For a pen­sion that’s fu­ture proof

In­vest­ment rule changes mean new ap­proaches are needed for nest-egg max­imi­sa­tion, says Tony Har­ring­ton

The Herald Business - - Commercial Report: Private Wealth -

ON April 6 next year the Govern­ment’s plan to re­duce the amount any in­di­vid­ual can in­vest in their pen­sion comes into ef f ect. From t hat date t he an­nual tax-de­ductable al­lowance that can be paid into a pen­sion will be cut from £50,000 to £40,000.

This is part of the UK Govern­ment’s aim to re­strict the amount of tax re­lief given to in­di­vid­u­als, thereby in­creas­ing tax rev­enues and help­ing it to pay down the UK’s huge pub­lic sec­tor debt.

To many read­ers this re­duc­tion in the size of the tax-free al­lowance will sound like some­thing with which only the rel­a­tively rich need to con­cern them­selves.

How­ever, as Tur­can Connell As­set Man­age­ment’s fi­nan­cial plan­ning di­rec­tor Derek Blaik ex­plains, even those on rel­a­tively mod­est salaries could find them­selves caught by the change. If they are, they could be look­ing at puni­tive ad­di­tional tax bills.

“When an in­di­vid­ual gets a sig­nif­i­cant salary in­crease and they are a mem­ber of a ‘fi­nal salary’ pen­sion scheme, this will usu­ally also mean an in­crease in pen­sion ben­e­fits by a pro­por­tion­ate amount.

“What you have to re­alise is that the In­land Rev­enue works out what the equiv­a­lent sum as a one­off lump-sum pay­ment would be, by mul­ti­ply­ing the ad­di­tional pen­sion sum by a fac­tor of 16,” Blaik points out.

Un­der this rule if the sum ac­cru­ing in a pen­sion was in­creased by £2500 a year (af­ter in­fla­tion is con­sid­ered), then the x16 fac­tor au­to­mat­i­cally puts the in­di­vid­ual at the £40,000 limit. Any­thing ac­crued over that would at­tract tax at up to their high­est tax rate.

For this rea­son Blaik says that mid-tier and higher-paid em­ploy­ees need to be aware of the chang­ing pen­sions land­scape, and it may well be that they need to con­sider work­ing out an ar­range­ment with their em­ployer in which they are given cash in lieu of an ad­di­tional pen­sion con­tri­bu­tion. This change also co­in­cides with a re­duc­tion in the Life­time Al­lowance on pen­sion fund­ing from £1.5m to £1.25m from April 2014. The higher per­sonal in­come tax rate of 40% (45% for those earn­ing more than £150,000 per an­num) is ac­tu­ally sub­stan­tially lower than the 55% tax one would have to pay on any sum in ex­cess of £1.25m built up in one’s pen­sion fund, lead­ing to a po­ten­tial tax sav­ing of up to 15%.

What we are see­ing are higher earn­ers and high net-worth in­di­vid­u­als in­creas­ingly look­ing for al­ter­na­tive, tax-ef­fi­cient ways of sav­ing. The tra­di­tional habit of push­ing as much as pos­si­ble into the pen­sion plan has given way to look­ing at other in­vest­ments. Th­ese in­clude di­ver­si­fied in­vest­ment port­fo­lios and off­shore in­vest­ment bonds. Off­shore bonds of­fer the op­por­tu­nity to de­fer any li­a­bil­ity to in­come tax for a po­ten­tially long pe­riod.

For the in­vestor will­ing to take a high level of risk, there are en­ter­prise in­vest­ment schemes (EIS), which have been around since 1994, and where in­vest­ments in qual­i­fy­ing com­pa­nies of­fer valu­able tax breaks. Ven­ture cap­i­tal trusts (VCTs) also of­fer at­trac­tive tax breaks, in­clud­ing in­come tax re­lief on qual­i­fy­ing in­vest­ments. How­ever, Blaik says that in­di­vid­u­als need to take pro­fes­sional ad­vice. “We have seen sev­eral in­stances where, al­though the in­vestor gained tax re­lief through an EIS or VCT scheme, the com­pany it­self lost sub­stan­tially so that the in­vest­ment as a whole cre­ated a sig­nif­i­cant loss for the in­vestor.”

“In­di­vid­u­als re­ally do need to take care and seek pro­fes­sional ad­vice when con­sid­er­ing th­ese pen­sion rule changes and any al­ter­na­tive in­vest­ment strate­gies,” he adds.

Derek Blaik of Tur­can Con­nell As­set Man­age­ment says the right ad­vice is cru­cial to an al­ter­na­tive in­vest­ment strat­egy

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