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Business Tax  •  HMRC  •  IHT  •  Personal tax  •  Probate and Inheritance Tax  •  Tax Planning  •  Tax Relief

5 ideas for tax efficient retirement planning

By RJP LLP on 11 May 2018

Whether you run your own company or are an employee, a care free retirement is something we all look forward to. You’ve worked hard for many years and want to ensure that when you do eventually retire, you can enjoy a good quality of life, with maximum levels of disposable income. Carefully managing your financial affairs sooner rather than later is essential to achieve this, and this includes avoiding any unexpected tax traps.

This article outlines some of the most commonly encountered retirement tax traps and how to avoid them.

1. Paying tax for exceeding the lifetime pensions allowance

Currently, the maximum amount that can be held in a pension is £1.03 m and anyone who exceeds this level is hit with a tax penalty of up to 55%. This is affecting ever increasing numbers of people and in the last tax year, 2,410 taxpayers paid a combined £110 m in penalties.

WHAT CAN YOU DO ABOUT IT? To mitigate the impact, it may be necessary to stop making contributions, but this needs careful evaluation. For instance, if your employer is making the contributions and you will exceed the lifetime allowance level it may still be beneficial to continue growing the pension. After all, even if you did incur a 55% tax penalty, the remaining 45% of the extra income is likely to be still worth having!


2. Paying tax on pension contributions

Whilst the standard annual pension contribution allowance remains at £40,000, this figure reduces for people with higher incomes, to a minimum level of £10,000 per year. For someone with a £150,000 total income or higher, the pension allowance is reduced by £1 for every £2 of earnings above the £150,000 level. Income is calculated from all sources – salary, dividends, rental property income and any benefits in kind.

WHAT CAN YOU DO ABOUT IT? It is complex but possible to maximise contributions using the ‘carry forward’ rules. This allows someone to make increased contributions during one year using unused allowances from earlier periods, for up to three years. Professional advice is needed to pursue this option.


3. Consider other investment vehicles

Pensions are the obvious choice when it comes to financing retirement, but there are some other tax efficient avenues, albeit some of them come at a slightly higher risk. Firstly, there are ISAs and other tax efficient savings bonds which are relatively low risk. Once these options have been exhausted, consider other investments that are tax advantaged, such as EIS (Enterprise Investment Scheme) and VCT (Venture Capital Trust) investments. The EIS in particular offers generous tax advantages and investors can obtain 30% income tax relief on amounts invested. Gains can also be rolled over and re-invested, to defer capital gains tax payable.

HOW CAN YOU BENEFIT? EIS can be a very worthwhile investment strategy under the right circumstances. It’s important to seek advice before investing in EIS companies and to understand the qualifying rules. There are strict processes that must be followed in order to benefit from the tax relief available, which we highlight in another recent article.


4. Minimise inheritance tax on your estate

If you have a pension, it can usually be passed onto your next of kin or another named beneficiary tax efficiently. In cases where an individual should die before reaching the age of 75, the pension can be inherited free of tax. After this time, the beneficiary pays income tax on income from the pension, as and when it is drawn down.

WHAT CAN YOU DO ABOUT IT? It’s important to seek advice but since the investment in, and the transfer of, a pension are tax efficient, this tends to be the first area of focus for many individuals, followed by the use of other tax advantaged strategies.


5. Minimise surplus funds in a taxable estate

One of the best ways to minimise tax during your retirement is to give away assets where possible, to reduce the size of your taxable estate. The government is currently reviewing the inheritance tax and gifting rules, but currently it is possible to gift £3,000 a year (this allowance can also be carried forward one year) plus make other small tax free gifts. For example, a couple who have not used their previous year’s entitlement can gift £12,000 in a single year (3,000 each per year, using one year’s unused allowance).

It is also possible to gift higher value assets tax efficiently, using the potentially exempt transfer rules (PETs) provided that you do not need the asset and no longer derive any benefit from it. However, you must also consider the impact of capital gains tax if you are gifting assets such as property or shares.

WHAT CAN I DO? As this is under consultation, it is highly likely the inheritance tax rules will change in the medium-term future. Currently the PET rules are relatively accessible and provided an individual survives for 7 years after making a PET, no inheritance tax liability is likely to arise. This timeframe could increase, and other restrictions may also be introduced, so it’s worth seeking advice on earlier rather than later.


For more information about retirement tax planning, please contact Lesley Stalker by emailing


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