Supplementing your Pension
For many individuals, their pension will be the cornerstone of their retirement income. However, when it comes to wider retirement planning, it might also be important to diversify income streams. This is particularly relevant for those with Lifetime Allowance and Annual Allowance problems. There are a number of strategies that we consider when helping clients supplement their pensions. Here are a few for you to consider:
1. Pension benefits in your spouse’s name
If your spouse does not have considerable pension benefits then consider building up additional pension benefits in their name. Tax relief on contributions and the tax efficiency of pensions remain. Furthermore, defined contribution pensions now have considerable Inheritance Tax benefits.
2. Individual Savings Accounts (ISA)
The key advantage of an ISA is that the returns – both income and capital growth – are free of personal taxes. You can save up to £20,000 each in the 2017/2018 tax year. These generous allowances mean that you can build up sizeable ISA portfolios over time. When you withdraw the money you can do so completely free of taxation.
3. Build an Investment Portfolio
Taking partial withdrawals of capital from an investment portfolio can also supplement your income. This can be done tax efficiently through utilising your annual Capital Gains Tax (CGT) allowance. Individuals can realise gains of £11,300 in 2017/18 without incurring any tax. The CGT allowance is a particularly important tax break for anyone with sizeable portfolios of ‘non-tax wrapped’ investments.
4. Consider an Investment Bond
Investment bonds can be tax efficient in a certain set of circumstances. They allow you to take withdrawals of up to 5% of the amount originally invested each year, for up to 20 years as a return of capital. This can, for example, allow investors to defer a tax liability, which could be particularly useful if they become a basic rate tax payer in retirement.
5. Consider Venture Capital Trusts (VCTs)
VCTs are higher risk investments that provide significant levels of statutory tax relief. They give up to 30% income tax relief on the initial investment, provided that the shares are held for a minimum of 5 years. In terms of income, dividends from VCTs are completely tax free. So for example, a 5% dividend from a VCT for a 40% tax payer is equal to 8.3% of gross income from a taxable investment. There is no capital gains tax or income tax to pay on sale of VCT shares by the investor.
6. Consider Enterprise Investment Schemes (EIS)
EIS are very similar to VCTs. They are also higher risk investments that attract 30% income tax relief on the initial investment, provided that the shares are held for at least 3 years. After 2 years, holdings in EIS will be exempt from inheritance tax and this will save an estate a potential 40% in death duties. Furthermore, no CGT is payable on disposal of an EIS investment, provided that you obtained income tax relief and have held the shares for at least three years. If you sell EIS shares for less than your net cost of investment, the loss can be set against income or capital gains.
The importance of having a retirement plan – it’s never too early
In our view, a plan for your retirement should be put together with the help of a qualified independent financial adviser. They will consider all of your circumstances, goals and objectives and recommend a course of action which is right for you and your family. For further help and guidance with your retirement plan, please call 0203 6386 698 or email enquiry@lionmede.co.uk
The information in this article does not amount to personal advice. You are strongly advised to obtain specific, personal advice from an independent financial adviser about your own circumstances and not to rely on the information or comments in this article.