These Tips are based on frequent, or newer questions that we get.
We can’t give you advice, so can’t tell you what you should do. We can help you get the most from Guiide by understanding how to use our tools better.
Many people now ask us – How do I allow for any tax on savings?
1. You don’t pay tax on savings withdrawals like pensions!
Every time you take a withdrawal from a pension pot it is taxable income, unless you are taking, some or all, of the 25% which is not taxable as a lump sum. Or taking 25% of each payment tax free. This is up to the maximum limit of tax free cash possible.
Anything coming from your savings pots you don’t pay income tax on. Therefore, forget about income tax on savings withdrawals.
But……. you may pay tax on savings in other ways. If they are invested in stocks and shares or other investments, you may pay tax on capital gains and on any income or dividends.
If they are in cash you may pay tax on any interest.
However, these are effectively taxes on the return you get if the proceeds are reinvested.
2. ISA and Non ISA savings
Individual savings accounts or ISAs are the main way people can shield themselves from tax on these returns.
If all your savings are in ISA’s, all good, there is no tax to pay. So no need to think about it.
Savings accounts with a bank and non ISA investments, generally in a General Investment Account GIA) will be subject to taxes on returns.
3. How to allow for different types in the Savings Return assumption?
If you expect 5% return after charges a year and all your savings are in an ISA use a 5% return for savings pots.
If you expect 5% return after charges a year and all your savings are in an non ISA, use say a 4% return if you expect to pay 20% tax on the returns generated.
The tax payable on returns is then allowed for in the actual return assumption.
If you have 50% in each, use say 4.5% as an estimate.
3. Specific cases
What if my savings pot pays me an income only and that income is taxable?
Do not put anything in your savings pot.
Instead put an income figure generated from the savings in other income for as long as you expect to just take income from it, without touching any of the main value itself.
If you plan to do this for life just use 40 years.
This may be a savings account where income is paid into your current account or an investment where income is paid into your curret account.
The key being the income is never reinvested, just used to live on.
What if I do want to draw down the value later?
Just put the income in as above, but stop this from when you think you will need to start taking from the main value.
Then add the main value in as Another Lump Sum at that date in future.
Your savings pots can then be modelled as drawn down flexibly from that point as needed in the plan.
We hope this is helpful and more top modelling tips are coming soon.
If you have any question at all as always just contact us at contact@guiide.co.uk.
