Expert view: An efficient tool for boosting tax-free income
This enables individuals to plan for retirement and greatly reduce their income tax bill. A 100,000 Isa fund producing 4 per cent income (4,000 a year) is the gross equivalent to a higher rate taxpayer of 6,666 a year in pension income.
In 2011-12, the income level where basic rate tax becomes payable for those over 65 is 9,940 a year. With the basic state pension providing 5,311.80 a year, it takes only 4,628.20 a year of taxable income from a private pension to use up an individual's tax-free allowances.
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Hide AdAny excess income above that level incurs 20 per cent tax and the age allowance trap can bite for those over 65 as they lose 1 of their additional tax-free allowance (2,465) for every 2 taxable income between 24,000 and 28,930 - effectively taxing them at 30 per cent on this income.
For the average or higher earner, it clearly makes sense to use the full Isa allowance to build up a tax-free portfolio to supplement the taxable income from a pension in retirement; this income can also help to offset losing the benefit of the additional age allowance available at 65 as it is non-tax assessable.
• Andy Cumming is managing director at Scott-Moncrieff Wealth Management