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Where now for Retirement Planning? - news article image

Where now for Retirement Planning?

7 Mar 2017

3 minute read

This year saw not only a further reduction in the maximum pension fund that can be accumulated before suffering a penal tax charge, but an even more draconian cut in the amount that can be paid into a pension and benefit from tax relief. The introduction of the Tapered Annual Allowance, when set alongside the introduction of the Lifetime ISA, is in our view a clear indication that the Government is finally heading towards a system of limited tax relief on pension contributions.

For those with earnings from all sources over £110,000 per annum, the ability to pay pension contributions and claim full marginal tax relief is potentially restricted by the new Tapered Annual Allowance. Once any carry forward of unused prior allowances from the previous three years has been used up, for many high earners the reality is that £10,000 per annum will be their limit for the foreseeable future.

Where contributions are paid by an employer or you still have membership of a defined benefit scheme of some sort, there is the possibility of paying tax on the pension contribution paid on your behalf if it exceeds £10,000.

It makes the issue of a Lifetime Allowance cut to £1,000,000 fairly irrelevant for those high earners who have yet to build up much in the way of a pension fund.

So with pension funding increasingly limited and ISAs nice, but not offering tax relief, where can one look for alternatives?

One area that we expect to become more popular as a result of these changes is investment into Venture Capital Trusts (“VCTs”). VCTs offer the opportunity to invest up to £200,000 each tax year into portfolios of smaller companies and receive 30% income tax relief on the contribution. Unlike a pension contribution, this 30% is a deduction from your income tax due for the year, so you need to have paid or be due to pay the tax in order to claim the relief. Although the investment has to be held for at least 5 years to not lose the relief, this is not at odds with the retirement planning concept.

Like a pension, the VCT offers the opportunity for tax free growth. However, unlike a pension, there is no tax on extracting that growth and VCTs are able to pay out income in the form of dividends tax free. A number of longer running VCTs are now very much structuring themselves with a view to running for the longer term and paying out relatively consistent annual dividends.

Unlike a pension, a VCT does not give you the option to flee for safety if stock markets are plummeting. The underlying investments are shares in unlisted or listed companies but smaller listed companies and however much a manager may diversify and look to control risk, ultimately they are risk based investments. However, if one part of your retirement planning portfolio is inherently riskier, if you pan out and look at the whole, one can compensate for this by taking less investment risk in other parts of the portfolio, such as the pension fund.

So as part of an overall retirement plan, we expect to see a growth in the use of VCTs alongside pensions, property, ISAs and cash, as higher earners seek the benefits of tax relief in an ever unrelieved world.

Shaw Gibbs Financial Services Ltd is authorised and regulated by the Financial Conduct Authority.

The Financial Conduct Authority does not regulate tax advice

Where now for Retirement Planning? - news article image

Author:

Ed Gibson

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