Complements to traditional retirement planning
Senior Client Adviser Tom Kimche details complementary tools to manage your wealth with regards to retirement.
Complements to Traditional Retirement Planning
Since I began my career in financial planning, higher earners* have found it ever increasingly difficult to fund their retirement in a tax efficient way, that is also unlikely to fall foul of HMRC scrutiny. Pension changes such as the reduction of the lifetime allowance to £1.03m and the introduction of the tapered pension annual allowance for those earning more than £150,000, have meant that clients often look to other tax-efficient investments to bolster their savings for retirement.
Individual Savings Accounts (ISAs), on the contrary, have become a slightly more attractive investment vehicle in recent years as the inheritably, investment flexibility and investment allowance have all improved. They are therefore suitable for many types of clients, although the tax shelter ISAs provide is still limited to £20,000 per annum per person.
A couple may therefore contribute the following between them using the above ‘vanilla’ options:
- £40,000 per annum to ISAs.
- £20,000 per annum to pensions (assuming both are high earners and no carry forward allowance).
Alternatives to Pensions and ISAs
It may be that the annual level of savings a client is making can be covered solely by pensions and ISAs, although for many of our clients, something beyond this is also required. This is often done by investing via a General Investment Account (GIA) that is able to hold a similar range of investments to those that are already held in a pension and ISA portfolio.
Investing via a GIA allows clients to take advantage of their annual capital gains tax exemptions (£11,300 each currently), their annual Dividend allowances (£2,000 each currently), and their annual Savings Interest allowance (up to £1,000 each currently).
Whilst utilising the above allowances is beneficial, for clients that are comfortable and able to take a higher level of risk, we often recommend a number of investments with correspondingly attractive tax benefits, as discussed below.
VCTs are listed companies that invest in the shares of other small companies and the VCT manager researches and selects which companies to invest in. Clients get income tax relief when they buy newly issued shares in VCTs and the tax relief is at a rate of 30 per cent on investments of up to £200,000 per tax year which is provided as a tax credit to set against the client’s total income tax liability. Shares must be held for five years to maintain the full benefit of the income tax relief. In addition, any dividends paid by the VCT on the shares will be tax-free, and any gains when a client comes to sell the VCT, will be free from capital gains tax.
An EIS is similar in that it is designed to encourage investment in smaller, unquoted companies, however, an EIS is typically considered to be slightly higher risk than a VCT because it invests in fewer companies. Income tax relief of 30 per cent is also available on EISs which can be claimed up to a maximum of £2m invested, giving a maximum tax reduction in any one year of £600,000. The shares must be held for three years, and EIS holdings are also except from capital gains tax although dividends are taxable.
It must be remembered that even after taking the income tax relief into account, EISs and VCTs are high risk as the relief is designed to encourage wealthy people to invest money they can afford to lose into fledgling businesses.
It is important to understand that VCTs and EIS are not a direct replacement or alternative for pensions, given the esoteric nature of the assets these invest in, and the high-risk nature of these schemes. They can, however, be a valuable part of an overall financial plan alongside ISAs, pensions and the use of other exemptions and allowances.
At Strabens Hall we get to know a client’s circumstances and recommend the most suitable strategy for clients, in line with their objectives and attitudes to risk. This could mean using products and savings schemes that attract tax relief or other tax advantages such as Business Property Relief (BPR) and tax deferral using offshore bonds for gross roll-up.
If you would like to speak with someone about your retirement and pension planning, contact us today.
*Deemed, in this case, to be individuals earning more than £150,000p.a., where the annual allowance for pension contributions reduces.
Tom Kimche, Senior Client Adviser