The 8.5 per cent increase in average annual earnings growth between May and July is good news if you receive the state pension – as, in theory, given the triple lock, this means pensions will increase by this amount in turn. Even if, as rumoured, the government opts to instead use the ex-bonus wage growth figure (7.8 per cent), that would still be a decent increase ahead of inflation.
The one downside is that the state pension will eat up even more of the £12,570 personal allowance for income tax. An 8.5 per cent increase, for example, would increase its total value from £10,600 this tax year to over £11,500 in 2024-25. Income over the value of the personal allowance is taxed at 20 per cent and, because this allowance is frozen until at least April 2028, the entire personal allowance could soon be used up in this way.
This underscores the importance of being able to draw retirement income from a variety of sources and accounts, rather than just pensions. Although you can take up to 25 per cent of what you hold inside private pensions tax-free, the remaining 75 per cent is taxable at your marginal rate.
You can earn dividends from investments held outside individual savings accounts (Isas) and pensions worth up to £1,000 tax-free in the current tax year, and £500 per year from April 2024. You can sell investments outside Isas and pensions with gains worth up to £6,000 in the current tax year before having to pay capital gains tax (CGT), falling to £3,000 from next year. You can also offset losses against your gains.\
For this reason, it makes sense to hold both growth and income investments so that you can make use of both allowances. Look to use the dividend and capital gains tax (CGT) allowances before drawing from Isas, because you cannot carry forward these allowances. Regularly taking gains from investments outside tax wrappers also means that their value does not grow unchecked, which could expose you to a large CGT liability.
Income from bond investments and cash outside pensions and Isas, meanwhile, can be offset against the personal savings allowance of £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. And if your annual taxable income falls within the £12,570 personal allowance you also benefit from the starting rate for savings of £5,000 (those earning between £12,570 and £17,570 will have a tapered version of this rate).
If you are married or in a civil partnership, use both sets of all your allowances to increase the amount of tax-free income you can take each year. Married couples and civil partners can pass assets to one another without incurring CGT. You could each take income without tax of over £25,000 in the current tax year, or over £22,000 in 2024-25, by making use of your personal, CGT, dividend and personal savings allowances, and starting rates for savings.
If you need more, you could draw from individual savings accounts (Isas) and pensions tax-free cash. You can draw from Isas tax-free and, unlike with pensions, with most types of Isa there is no minimum age restriction on when you can take money from them. You can invest up to £20,000 a year in Isas
Meanwhile, venture capital trusts (VCTs) offer income tax relief of 30 per cent if you hold them for at least five years, and pay tax-free dividends that could form a part of a tax-efficient retirement income. However, they invest in early-stage companies and are high-risk, so only use them if you have a substantial taxable income and after exhausting all other options.
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