Mike Alford, senior wealth adviser at Canaccord Genuity Wealth Management, explains some of the ways high earners can think outside the pensions box for other tax-efficient means of saving for retirement.
There really is no stone that the Government has left unturned where pensions are concerned. Pensions had largely been left untouched until the “Pensions Simplification” initiative was announced back in 2006, which kick-started an era of pension changes. And in the 28 Budgets and Autumn Statements since, 24 of them have included amendments to pension rules. Unfortunately, with this complexity and added uncertainty around pensions, pensions saving amongst the general population has fallen off a cliff in the last 15 years.
High earners might be affected by the lifetime allowance (currently capped at £1,073,100), the annual allowance (currently capped at £40,000) and the tapered annual allowance (which can reduce to just £4,000 for individuals with ‘adjusted income’ over £312,000).
And for high earners, it’s not been straightforward either. Pensions simplification has meant they are faced with restrictions and potential pitfalls, so it’s important to get help from a professional to understand the rules and the implications they might have. High earners might be affected by the lifetime allowance (currently capped at £1,073,100), the annual allowance (currently capped at £40,000) and the tapered annual allowance (which can reduce to just £4,000 for individuals with ‘adjusted income’ over £312,000).
These changes mean high earners are limited in what they can save into a pension each year. So, what are the tax-efficient options open to high earners who want to save more for retirement?
Family Investment Companies
Investing in a Family Investment Company (FIC) is an option. An FIC – a limited company whose shareholders are family members, funded by the founder via a loan – can be a tax-efficient way of investing money. Income generated by the company will be subject to corporation tax of 19% and shareholders only pay tax when the company distributes income. FICs have become increasingly common as trusts – traditionally an important part of estate planning – have become more complex and subject to increasing taxation and reporting requirements in recent years.
FICs have become increasingly common as trusts – traditionally an important part of estate planning – have become more complex and subject to increasing taxation and reporting requirements in recent years
ISAs
Since their launch in 1999, ISAs have been a runaway success. ISAs allow you to place £20,000 each year in a tax-free wrapper (£40,000 for a married couple), and the compounding effect plus a supportive market over time can make a real difference.
ISAs have become increasingly popular, proving to be a valuable tax shelter for investments and savings, with the main attraction being that you don’t pay further income tax on dividends from shares, or interest on cash and bonds. Neither do you pay Capital Gains Tax (CGT) on gains you make from stocks and shares.
With interest rates continuing to drag along the bottom – at or close to zero, and with the possibility of negative rates – ISAs have become even more attractive to thwarted savers. A few years ago, research identified more than 1,000 ISA millionaires in the UK, and this number has certainly expanded since.
Top Tip
We get a very high volume of enquiries from people who are seeking tax-efficient ways to save for retirement because they have used up their allowances (or likely will before too long). The good news is that there are many alternatives, as this article sets out, and we can set up discussions with a shortlist of pension planning experts fast and free. Just take our short matching questionnaire.
Lee Goggin
Co-Founder
Spreading investments between spouses
Putting a portion of your investment capital in your husband or wife’s name makes a lot of sense for retirement planning purposes. It allows each of you to take advantage of your respective tax positions and allowances, and could boost your net position.
Putting a portion of your investment capital in your husband or wife’s name makes a lot of sense for retirement planning purposes
Offshore bonds
An “offshore bond” is a tax-efficient investment wrapper set up by a life insurance company in a jurisdiction with a favourable tax regime, such as the Isle of Man or Dublin. Because any growth in the investments held within the bond is not subject to UK tax, it can be a useful way to top up retirement savings, although foreign taxes might be deducted at source.
And you can withdraw up to 5% of your original investment each year for 20 years, without incurring an immediate income tax liability. If the 5% allowance is not used in a given policy year, the unused allowance carries forward to the next policy year on a cumulative basis. This enables you to select the most opportune time to incur a tax charge.
If your investment strategy or circumstances change and you need to switch your underlying investments you will not incur any tax liability – unlike in the UK, where there is a capital gains tax (CGT) liability when selling or buying underlying investments
If your investment strategy or circumstances change and you need to switch your underlying investments you will not incur any tax liability – unlike in the UK, where there is a capital gains tax (CGT) liability when selling or buying underlying investments.
Venture capital
The government is committed to making the UK one of the best places to start, finance and grow a business in Europe. Incentivising private investment into smaller businesses through enterprise investment schemes (EIS) and venture capital trusts (VCT) is part of this strategy.
VCTs are companies listed on the London Stock Exchange. They are run by fund managers and typically invest in unquoted and/or smaller AIM-listed companies – a sub-market of the London Stock Exchange. EISs are direct investments in unquoted companies. EIS and VCT investments attract tax reliefs – provided the investment managers keep to certain rules – but also carry a high level of investment risk. There are limits to how much you can invest and the tax relief available is subject to a minimum holding period. EIS and VCT investments are complex, so specialist wealth planning advice is needed.
High earners who want to maximise saving for their retirement need to start thinking outside of the pensions box for other tax efficient means of saving
High earners who want to maximise saving for their retirement need to start thinking outside of the pensions box for other tax efficient means of saving. And from FICs and ISAs to offshore bonds and venture capital, there is a range of options to consider. But they can be complex and having a professional to help navigate the waters is definitely advisable.
Disclaimer
The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.
The tax treatments set out in this communication are based on our current understanding of UK legislation. It is a broad summary and cannot cover every circumstance and it does not constitute advice.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
EIS and VCT
Investments in VCTs and EISs should be regarded as high risk as they invest in small companies with shares that are highly illiquid and can be hard to sell. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. They attract tax reliefs provided the underlying managers keep to certain rules.
