Save for retirement
HM Revenue & Customs’ new lower lifetime pensions allowance will catch out many middle-to-high earners, to the tune of up to a 55 per cent tax bill. So what are the alternatives to pensions as savings vehicles for retirement?
There are believed to be approximately 360,000 people (according to latest HM Revenue & Customs’ estimates) who are liable for a tax bill which is equivalent to several year’s salary if they exceed the new lower lifetime pensions allowance, which is being cut from £1.5m to £1.25m, the new maximum permitted tax-exempt pension fund you can build up over your lifetime.
What are the options now? There is a broad choice of attractive alternative investment
vehicles and tax wrappers to choose from, but you need to assess their suitability in
relation to your own particular pension pot.
Spouse / civil partner pensions: Contributing to a pension for a spouse or civil partner can yield a valuable return. If your spouse is employed you can pay up to the higher limit of 100 per cent of their salary or £3,600, less any contribution already being made by your spouse. They will receive tax relief on the contribution and the ‘gift’ will be covered by the spouse exemption for Inheritance Tax.
Capital Gains Tax: Use your annual exempt allowance for Capital Gains Tax (CGT) every year otherwise its gone for good. Realising capital gains on mutual funds on an annual basis ensures that you maximise the benefit of your CGT annual exempt allowance
all the time.
Fill the gaps in tax wrappers: Re-route money that can’t go to the pension fund by
making sure you use all your tax wrapper limits. High-risk investors may want to look at
Venture Capital Trusts, for example.
Defer tax offshore: Tax deferred can be tax saved, if it is done correctly. If you are a
higher rate taxpayer now, it can be taxefficient to invest through an offshore bond.
Tax is not due until the funds are drawn from the bond, so by planning ahead you can take
the gains when paying less tax in retirement, or assigning to a non-taxpayer.
Diversification reduces tax exposure: Spreading your investments across assets that
are subject to income tax, instead of those that are primarily subject to capital gains tax,
puts you in a stronger planning position for any variations on either or both of these
categories that may be introduced at a later date.
Maximum Investment Plans (MIPS): annual payments for a period of 10 years or
more are on the increase as alternative investment vehicles to pensions because they
mirror a saver’s contributions to a pension, generally over a shorter time frame. Payments
incur a low tax rate and the fund matures after a set period, typically 10 years.
Because the initial investment is protected, it works like a short-term endowment that
doubles as a life assurance policy.
Retail Bonds: Retail Bonds are loans that individuals can make to businesses, including
blue chip companies like Tesco Personal Finance or RBS and these are becoming
increasingly popular investments. The advantage is, they have a fixed maturity date, so you can buy a bond knowing how much income it will pay each year at an annual average return somewhere between 5-6 per cent. You also know when your capital will be returned.