Financial expert James Shack explained that many people turn to him for advice when planning for retirement to avoid simple mistakes, but there are a growing number of people with issues that they “can’t solve.” . These are errors that cannot be fixed and which can seriously jeopardize the future, he warned. Worryingly, this could potentially have a negative impact on their retirement and deplete their pensions.
In a recent YouTube video, he discussed the three biggest money-purchase retirement mistakes some of his retired clients have made and explained how and why they should try to avoid them.
1. Collection of a full annuity in the form of capital
Mr Shack explained that a retiree withdrew all of his £ 200,000 pension to invest in property for rent.
The man received £ 50,000 tax free while the rest was taxed as if he had earned the income in that year alone.
As the man was still working and was a high rate taxpayer, he ended up paying £ 67,000 in income tax which meant he only had £ 132,000 left.
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Mr Shack said: ‘Not only has he paid £ 67,000 in pension tax, he also has to pay £ 4,500 in tax every year he continues to work, which he should not have. pay otherwise.
“There’s no getting back from this.”
2. Using a non-taxable lump sum to pay off the mortgage
Additionally, another mistake Mr. Shack has witnessed is that retirees want to pay off their mortgage with their tax-free lump sum cash from their pension.
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The next example he gave was of a couple who had a payment of £ 250 per month on a mortgage with only 1.25% interest that they didn’t want to weigh on them in retirement. . They ended up withdrawing £ 200,000 of tax-free money from their pensions to pay it back.
He said: ‘We have £ 200,000 coming from a tax-exempt growth environment, so if invested properly it could potentially generate an average return of, say, 6% and ultimately turn into 250,000. £ over the years.
“At the same time, that £ 200,000 mortgage has an interest rate which is, as I speak, lower than the rate of inflation, which means that with each passing year this debt gets smaller and smaller. in real terms.
“So you take £ 200,000 out of a unique, tax-efficient investment opportunity to pay down debt that is making you money in real terms.
“So another option could be to just keep that £ 200,000 invested and find a way to cover those mortgage payments or you could take just enough out of your pension each year to cover the payments.
“It might not be the right fit for everyone, but interest-only mortgages can be a great tool for accessing the money locked in your home, especially when you’re planning to cut your mortgage down anyway. workforce in the future. “
3. Take non-taxable cash to top up ISAs
Many people prefer ISAs to pensions because they can be easier to understand. With a limit of £ 20,000 per year, it might be tempting to want to use tax-free pension funds to supplement this, but Mr Shack explained that “it’s a bad idea”.
Pensions all have the same tax benefits as an ISA, but pensions have an added benefit that makes them “much more superior” than ISAs, he suggested.
He also explained the benefits of pension inheritance. People who die before age 75 can transfer their pension to a relative tax-free.
People who die after 75 can also inherit the pension without any inheritance tax, but they will have to withdraw it and pay income tax at their own marginal rate.
However, ISAs are part of the estate and people may have to pay estate tax on them.
Mr. Shack added, “This is why it may be best to sell your ISAs before you retire when creating retirement income. In fact, sometimes you don’t want to touch pensions at all because they are very good inheritance tax vehicles. “