The financial planning journal

Tax efficient investing in retirement – the four box principle

2 November 2021

The most common advice you hear is to diversify your investment portfolio but diversifying your tax wrappers effectively has the potential to have an even greater impact on your wealth…

There’s a method, known amongst financial experts, as ‘the four-box principle,’ which provides the secret to minimising the tax you pay on your retirement income.

It’s known as ‘the four-box principle’ as it focuses on four core tax wrappers. In order, those tax wrappers are:

  1. Your pension
  2. An ISA
  3. A general investment account
  4. A bond

What are the benefits of each tax wrapper?

All of these tax wrappers have various uses and benefits. These are applied differently depending on whether you are accumulating wealth or drawing on your assets.

  1. Pension contributions are gross of all tax (why they are incredible for building wealth) and free of capital gains tax. It is important to note that withdrawals from a pension are taxed at your marginal rate.
  2. Contributions to ISAs are net of tax but, once the money is in the ISA wrapper, there will be no further tax to pay!
  3. General investment accounts are a fully taxable environment (Income and CGT), but you can helpfully make use of your capital gains tax allowance to access a significant amount of money tax-free.
  4. Finally, a bond essentially defers tax. You can access 5% of your initial investment every year with no immediate tax charge and they are free of capital gains tax. Gains that are withdrawn from a bond will be taxed as income.

The four-box principle in practice

Whilst utilising all of the above may seem like an unnecessary amount of complexity, if you combine all four in the right way, it can have a liberating effect on your wealth.

Let’s look at the numbers using a couple with £2 million invested. The couple want to take around £90,000 a year in retirement. Using ‘the four-box principle’, believe it or not, they can access every penny of this completely free of tax.

They have the been working with an adviser for some time and have structured their assets as follows:


Tax Wrapper Amount
Pensions £750,000
ISAs £500,000
General Investment Accounts £500,000
Offshore Bond £250,000


They take £12,570 each from their pensions to make use their tax-free personal allowances, so that’s £25,140 total in tax free money.

Next, they take £27,760 from their ISAs, which again is tax free, followed by £24,600 from their general investment account.  To access the £24,600 in their general investment accounts, they make use of their annual capital gains tax allowances (£12,300 each), which means that this is also a tax free withdrawal. Finally, they take £12,500 from their bond which is the equivalent to 5% of their capital, so again there’s no tax to pay.

Tax Wrapper Tax free withdrawal Tax rule
Pensions £25,140 Using £12,570 tax free personal allowance x 2
ISAs £27,760 ISAs are tax free environment
General Investment Accounts £24,600 Using £12,300 tax free CGT allowance x 2
Offshore Bond £12,500 5% of original capital


In total that’s £90,000 a year completely tax-free!

If you’re building your wealth towards retirement, it’s absolutely paramount to make use of ‘the four-box principle’ to ensure that you can access your money in the most tax-efficient way possible. And, if it all feels a little bit too complicated, be sure to take some financial advice…


Saltus Financial Planning Ltd is authorised and regulated by the financial conduct authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested.

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