As retirement is such a key event in your life, planning ahead for it is essential.

A key part of that planning that you may want to consider is looking to structure a tax-efficient retirement income once you stop working and are no longer earning a salary.

This is particularly important currently as the tax burden has increased for many people in recent years. The freezing of Income Tax thresholds from 2021/22 until at least April 2028 means more of your wealth could be subject to Income Tax each year.

Fortunately, there are a series of tax rules, allowances, and exemptions you can make use of to help you construct a level of income that allows you to reach your goals while minimising the amount of tax you pay.

Awareness of these aspects can help guide your planning and saving and investing strategy in the years approaching your eventual retirement.

So, find out about six ways to manage your financial arrangements to create a tax-efficient retirement income and minimise the amount you have to pay to HMRC.

1. Plan alongside your spouse or partner

It is important to always remember that we are taxed as individuals. This means that all the rules you will read about here apply to each person rather than being shared by couples.

As with many financial planning issues, this means that it can be more powerful to plan your finances with your spouse or partner than separately.

The effect is that if you are married or in a civil partnership, you can effectively double the amount you can receive tax-free or pay a minimal amount of tax on.

As a result, it can be beneficial to consider your comparable levels of income and maximise your combined savings so you can mitigate tax together.

2. Always be aware of your Personal Allowance and tax bands

The Personal Allowance is the amount you can earn before you start paying Income Tax. In the 2024/25 tax year, this stands at £12,570.

Both you and your partner have the same allowance, which means that, as a couple, you can accrue over £25,140 of income before you start paying Income Tax.

You may also want to be cognisant of tax bands, and the levels of earnings at which you start paying higher rates of tax.

The table below shows the Income Tax bands for the 2024/25 tax year:

Understanding how tax is charged based on the income you earn is essential for planning effectively. You can draw your income around these thresholds to ensure that you only pay as much tax as you need to.

3. Take a tax-efficient income from your pension fund

It is likely that the bulk of your income will come from your accrued pension fund. So, it is worth spending time to work out how to best manage the amounts you draw, as this will play a key part in your income planning.

It is important to remember that you can take 25% of your fund tax-free. While you can take this as a one-off tax-free lump sum, you can also use it strategically in smaller amounts.

For example, some pension providers enable you to take tax-free cash on a regular basis, such as annually or monthly, rather than as a lump sum. This can help minimise the amount of tax you are paying in a particular tax year.

It is an especially useful facility if you have income from other sources that you can then top up with tax-free money, to keep the amount of tax you pay to a minimum.

Also, remember that Pension Freedoms legislation means greater flexibility around how you can take the taxable element. This means that you can take a different amount each year and look to manage your income on an annual basis, which can help with your tax and income planning.

4. Maximise your ISA allowances

ISAs are a highly tax-efficient way to save and invest. When you contribute to an ISA, any interest or returns you generate are free from Income Tax and Capital Gains Tax (CGT). Crucially, your ISA savings are also free from Income Tax when you come to withdraw them, which could offer another source of tax-efficient retirement income.

As of the 2024/25 tax year, the ISA allowance (which is the maximum you can contribute to your ISAs in a single tax year) is £20,000 for each individual over 18. As a result, a couple can currently save or invest a total of £40,000 into their ISAs.

So, if you both maximise your ISA allowances each year, you can each build a healthy fund that can play a key role in providing you with a source of tax-efficient income as and when you need it.

5. Structure income from an investment bond

You may also want to consider using investment bonds as an effective investment option with attractive tax benefits, particularly around drawing an income in retirement.

Each year, you can withdraw 5% of the amount you originally invested without incurring an immediate tax charge.

You can also carry forward any unused allowance from previous years, which provides an extra layer of flexibility when it comes to income planning.

Careful use of bonds through maximising the use of the 5% allowance and carry forward facility can really help create a tax-efficient income.

However, it is important to bear in mind that tax is deferred rather than not being payable at all. This is because a bond is a “non-qualifying policy”, which means you or your estate are liable for Income Tax when the bond is fully surrendered, it matures, on your death, or when excess withdrawals are taken from the policy.

6. Use your Capital Gains Tax exemption

CGT is payable on the profit you make when you sell assets such as non-ISA shares, other investments, and buy-to-let property.

Each individual has a CGT Annual Exempt Amount, which enables you to profit up to £3,000 (2024/25) on the disposal of such assets each year free of CGT.

This means that, by effectively structuring the ownership and sale of your assets, you and your spouse or partner can receive £6,000 of tax-free income each year between you.

Get in touch

If you need advice or guidance when it comes to your retirement income planning, please do get in touch with us at DBL Asset Management.

Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning or tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.