Money makeover: "I want to ensure I'm saving efficiently for retirement"

Moneywise reader Desmond Smith, a 64-year-old mediator from Sheffield, is married with two children (who are financially independent) and four grandchildren. (His wife’s and children’s finances have not been included in this money makeover.)

He is semi-retired, working part-time as a self-employed mediator on employment and discrimination issues. This earns him about £30,000 a year.

Desmond also receives an index-linked occupational pension of £20,000 a year, which comes from his days working for Leicestershire County Council.

In addition, he earns an income of £7,200 a year from a rental property he owns in Sheffield.

As Desmond turns 65 in December, meaning he will be able to claim his state pension, he is keen to find out if he is saving as efficiently as possible for retirement.

In particular, as a higher-rate taxpayer, he would like to check that he is maximising any available tax breaks. His goal is to enjoy a comfortable retirement.


Lisa Vaughan (pictured above), a chartered financial planner with Fogwill & Jones Asset Management Ltd in Sheffield, has stepped in to help Desmond. Her firm provides financial advice typically covering everything from investments, retirement planning, taxation and trusts, to savings, wills and lasting powers of attorney. Fogwill & Jones also offers discretionary fund management services. Here’s what she had to say.

Desmond has good level of savings and investments; the £5,000 he holds in a current account and the £15,000 he has in a cash individual savings account (Isa) act as a reserve he can access if he needs to.

Desmond also has £35,000 in a fixed-rate savings bond, which matures next February. He may have plans for these savings – for example, a car purchase – so it could be pertinent to put the money into a cash Isa, which would provide easy access and the flexibility required.

Key recommendations for Desmond:

  • Use the £15,420 annual individual savings account (Isa) allowance, and the £1,000 personal savings allowance to avoid paying tax on savings interest.
  • Request a forecast from the Department for Work and Pensions to provide information on his pending state pension.
  • Consider pension funding to help reduce some or all of the higher-rate tax he pays while he continues to work.


Use his Isa allowance

Desmond hasn’t used his Isa allowance this year, so he could place the full £15,420 allowance into an Isa before 5 April 2017. From 6 April 2017, a new Isa allowance of £20,000 is available that Desmond could use for the remainder of his matured funds. I would suggest a top rate easy-access Isa, but Desmond would have to check which provider is offering the most competitive deal at the time of maturity in February.

Moneywise says: At the time of writing, the best easy-access Isa was from Nationwide, paying 1.2% interest. Bear in mind that rates change though, and visit our best cash Isa rates page for the best rates, updated every week.

Desmond has already paid off the mortgage on his main residence, so this isn’t an issue. He has a mortgage of £40,000 outstanding on his rental property with six years left to run. While he has enough savings to pay off the mortgage in full, as the mortgage payments are consistently covered by the rental income, Desmond would rather retain access to his savings and let the mortgage run to the end of its term.

That said, Desmond should be aware of changes to buy-to-let rules. At the moment, he is able to deduct the cost of his rental mortgage interest from his property income before he calculates the profit on which he pays tax. But the government has announced changes to restrict the relief on mortgage interest payments for all landlords to the basic rate of income tax.

The restriction will be phased in over four years, starting from April 2017. As a higher-rate taxpayer, Desmond will therefore see an increase in the amount of tax he pays as he will eventually be liable for a further 20% tax on the mortgage interest amount.


Desmond (pictured below) says: “I will need to think about what to do with the money from my savings bond when it matures in February. I will weigh up at the time whether to go for a cash Isa or a stocks and share Isa. Another option could be for me to pay off my rental mortgage. I will first look into whether I’d need to pay any early repayment fees.”

Request a pension forecast

Desmond is due to start receiving the state pension in December 2016 when he reaches age 65. Heiseligible for the new state pension, which was introduced on 6 April 2016. The new state pension (2016/17) full amount is £155.65 per week. However, people may get more or less than this, depending on their National Insurance Contribution (NIC) record.

Desmond may receive a lower state pension because he has a public sector pension, which means he’s likely to have paid NICs at a lower rate. The state pension is also added to your income and taxed at your marginal rate, which for Desmond is 40%.


Desmond could choose to delay taking his pension. If he did this, his new state pension would increase by 1% for every nine weeks he put off claiming. This works out as just under 5.8% for every full year. Deferring may be an attractive option for Desmond if he wants to avoid paying higher-rate tax on more income.

However, each year deferred is a year of pension income lost and he will have to live for up to 17 years to get that amount back from the higher pension.

I would suggest Desmond contacts the Department for Works and Pensions to obtain a pension statement, which will provide a forecast of his state pension at retirement.

Moneywise says: You can contact the government’s state pension service on 0345 3000 168 or by completing its online form at

Desmond (pictured below) says: “I have requested a pension forecast from the government’s service, which is now being undertaken. I should receive the information in 10 days.”

Consider pension funding

Even though Desmond is semi-retired and in receipt of his occupational pension, he may still wish to consider further pension funding. He can’t contribute to his defined benefit pension as it’s already in payment, but he can set up a new private pension.

A pension contribution attracts tax relief at your highest marginal rate. It has the effect of reducing your taxable income and reducing the amount of income that is subject to the higher-rate tax of 40% in Desmond’s case.

Desmond earns £57,200 a year, so £14,200 of this will be taxed at 40%. If Desmond paid £11,360 into a pension, he would be entitled to £5,680 in tax relief from the government. Half of this relief would be claimed by the pension provider, and Desmond would claim the other half by declaring the pension contribution on his annual tax return.

He could invest a lump sum from savings and/ or use his net disposable income to contribute to a pension on a regular basis. When he draws his state pension in December, he could also invest this amount into a pension, which would help him to avoid paying higher rate tax on this additional income.

I would suggest a competitively charged self-invested pension plan (Sipp), such as the Liberty Sipp ( This would provide a good selection of investment funds and provide Desmond with the ability to drawdown with flexibility.

In the future, Desmond could then take 25% of his pension fund as a tax free amount. The remaining benefits would be taxed as income as he draws them. When he accesses the pension in the future, he is likely to be fully retired and a basic-rate taxpayer.

Pension funding would also help to build up funds that are exempt from inheritance tax (IHT). Depending on the plan, pensions can be passed on tax free if someone dies before age 75. If they die after age 75, the beneficiary may have to pay income tax, but at their highest marginal rate. Annual gifts of £3,000 a year can also be made IHT free.

Desmond’s main assets are valued under the individual nil-rate IHT band amount of £325,000. However, as his wife’s assets have not been considered here, there is still a risk that a potential liability could exist.

Desmond says: “I’m not sure how appropriate taking out another pension is, as I already have a pension and I’ll get my state pension in December too. What I will do is wait until February when my bonds mature, by which point I will also know what my state pension is, and then I will be able to undertake the relevant calculations to see if it’s the right option for me.”

He adds: “Overall this has been a very helpful process and Lisa has explained everything clearly and answered all of my follow up questions. I’m pleased with how it’s gone.”

None of the above should be regarded as advice. It is general information based on a financial report conducted by Lisa Vaughan, a chartered financial planner with Fogwill & Jones Asset Management Ltd. in Sheffield.


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