Get your retirement plans right and it can be the happiest time of your life. What’s not to love? More time to do what you want, whether that’s enjoying family life, travelling the world or pursuing your passions.
No surprise then that a recent study found that in the UK there’s an upward curve in our happiness from our 50s to a peak at the age of 70.
Making plans that give you peace of mind about money matters is a great start and the run-up to retirement is the perfect time to review your finances and set out your priorities.
Your pension is probably your biggest savings pot and can play a really important role in providing an income in retirement. But being smart about how you save into and then use ISAs (Individual Savings Accounts) could make your income in retirement more tax efficient and your money last longer.
ISAs can be a flexible friend
The tax efficiency and flexibility ISAs offer can help with everything from your dream holiday to home improvements, from a rainy day fund to boosting your retirement income. Yet more than half of over 50s feel they are too complicated.
But if you know what you want to achieve, saving into an ISA or using one to pay for what you want can be really straightforward.
How do ISAs work?
ISAs are a tax-efficient way to save. During this tax year (2019-20) you can save up to £20,000 without paying tax when you take your money out.
There are Cash ISAs, which let you earn a bit of interest on top of your savings, and there are Stocks & Shares ISAs where you put your money into investments.
Our article What are ISAs, who are they for and when should I consider one? covers the basics and the different types available. Our simple ISA calculator shows you how much a Stocks & Shares ISA could be worth in the future.
Think about what you need your money for
For a lot of people, retirement is the time to make long-planned dreams a reality. Perhaps it’s a new car, renovating your home or enjoying a big holiday.
If you can use money you’ve saved into an ISA to cover this sort of one-off spending, that might allow you to leave your pension money invested longer, and with the potential to grow, so it can be used as a long-term income.
Remember that as pensions and Stocks & Shares ISAs are both investments, their value can go down as well as up and they may be worth less than was paid in.
Not everyone will go straight from working full time to being fully retired. If you’re thinking of going part time or changing roles before taking your pension, your ISA savings could also come in useful to cover any reduction in your income.
And if your plans change, your ISA can too – you can split your yearly allowance across Cash and Stocks & Shares ISAs and transfer what you’ve saved from one to another.
Spending your ISA or pension first – what to consider
If inheritance tax is something that you think your loved ones may one day have to pay on your estate, it might be worth considering spending money from your ISA before using any pension money.
This is because your pension savings aren’t normally part of your estate, while your ISA would be included.
You can find out more about how pensions and Stocks & Shares ISAs compare when it comes to saving, spending and passing on your money tax efficiently in our at-a-glance guide.
How an ISA could help you plan for the unexpected
Wouldn’t it be great if we knew all the costs coming down the line? But life has a habit of throwing a few surprises at all of us, so it’s a smart move to put aside what we can for the unexpected. Saving up an emergency fund is something else an ISA can help with.
Cash ISAs are a tax-efficient way to save and some of them will let you take your money quickly should you need it. Make sure you check the rules about accessing your money and shop around before you make any decision.
A better interest rate may come with longer terms to access your money and it might be worth considering bank savings accounts too.
The Money Advice Service has some guidance on how much emergency savings are enough.
Using ISAs for a tax-efficient retirement income
Some people choose to use their ISA savings as a tax-efficient source of income when they retire – perhaps before they access, or to supplement a pension. If this is something you’re considering, it’s a good idea to think about how long you would like to keep any Stocks & Shares ISA and review where you’re invested to make sure it’s right for you.
If you’re unsure about your options you should consider speaking to a financial adviser. If you don’t have your own adviser, you can find one in your area at unbiased.co.uk.
You still have some time to make the most of this year’s ISA allowances before tax year end on 5 April. Find out more about Standard Life’s ISAs here or if you already have a Standard Life ISA, log on to check how it’s doing and consider topping it up if you can. And keep an eye on the UK Budget on 11 March, which will confirm what your allowances are for the next tax year, starting from 6 April.
* 1825 is a trading name for Standard Life Aberdeen group’s advice business.
The Standard Life ISA is provided by Standard Life Savings Limited.
The information here is based on our understanding in February 2020 and should not be taken as financial advice.
Laws and tax rules may change in the future and your own personal circumstances will have an impact on tax treatment. Pensions and Stocks & Shares ISAs are investments and their value can go down as well as up and may be worth less than was paid in.