How do I invest in the most tax-efficient way for retirement?

Investing for your retirement is an essential step in achieving a successful financial outcome when you retire. 

That being said, with so many options to explore for your investments, you might be wondering how you can take the most tax-efficient approach. 

Read on, where we discuss two of the most effective ways of investing tax-efficiently for your retirement – Individual Savings Accounts (ISAs) and personal pensions. 

Investing in an ISA for retirement 

Investing in an ISA allows you to grow your savings for retirement tax-free, up to a specified amount. You can save a sum of money each tax year in an ISA, and this money remains sheltered from tax. 

The maximum amount you can save annually is determined by the ISA allowance, which as of the tax year 2023/2024, is £20,000. 

There are four types of ISA you can invest in for retirement – cash ISAs, innovative finance ISAs, lifetime ISAs, stocks and shares ISAs. 

You are limited to only one of each type of ISA which you can open per tax year, and the ISA allowance applies to all your investments across each ISA type in the tax year. 

There are many benefits to tax-efficient investing with an ISA, such as: 

• Annual, tax-free savings – With ISA investments, you can shelter a portion of your income each year from tax. If you do this every year as you approach retirement, you can end up with a large sum of money that can be withdrawn tax-free when you retire.  
• Combined savings for retirement – If you have a spouse or civil partner whom you plan to spend your retirement with, both of you can make sure you maximise your ISA allowance each year. This can result in a combined total of £40,000 tax-free savings each year until you retire 
• Tax-efficient growth – If you choose to invest in a stocks and shares ISA, you won’t pay Capital Gains Tax or income tax on any growth from your successful investments. This can further increase your savings each tax year for when you retire. 

Investing in a personal pension for retirement 

A personal pension allows you to grow your savings each year, and access this money when you retire. 

Personal pensions can be offered by expert providers, and they allow you to contribute certain amounts to your pension each year, whilst being sheltered from tax. 

The current tax year has the annual pension allowance set at £60,000. Any money invested in your pension above this amount each year will result in you incurring tax charges. 

As of the current tax year, there is no longer a lifetime allowance on your pension. To find out if and how this might impact your pension, contact your financial adviser. 

When you choose to withdraw your pension, you can usually take 25% as a lump sum tax-free,  

There are several benefits to tax-efficient investing with a personal pension, including: 

• Abolished lifetime allowance – As of the current tax year, there is no longer an allowance on the total amount you can grow in your pension over your lifetime without being taxed. This means more of your money is sheltered from tax as you build your wealth for retirement. 
• Choosing your investments – You can choose which investments you want to make with the savings in your pension pot, to help you find the right level of risk and potential returns that suits your circumstance.  
• Efficient contributions – You can choose when and how much to contribute to your pension each tax year and remain free from tax if it’s under the allowance. This way, you can structure your contributions to grow your wealth effectively, whilst also suiting your financial situation. 

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Consult your modern wealth manager to discuss how these types of investments might help you build your wealth tax-efficiently for retirement, and more importantly, in a way that best suits your circumstance. 

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Please note, the value of your investments can go down as well as up.