From investments to pensions, you want to be sure that your finances are working as hard as they can for you in order to yield the best return possible. With careful tax planning considerations and making use of your allowances, this can help grow your wealth for later-life and ensure you are maximising opportunities to suit your needs.
Robert Maxwell was notorious for many things. Perhaps most famously of all, he fell off the back of a boat.
Upon Maxwell’s death it was discovered that he had raided the Mirror Group pension scheme, depriving many of his former employees of their rightful entitlement to a retirement income. It was a scandal of the most heinous type, impacting as it did on the financial security of thousands of honest UK workers. Given everything else that Maxwell was infamous for, the fact that this is arguably his worst offense really is saying something.
The pension scandal also reinforced the idea that pensions are unsafe, or untrustworthy. It’s a belief that still persists within certain parts of society today. And yet, what it did do – and if ever there is a silver lining to emerge from such financial tragedy that so impacted those directly affected – is it forced the rule makers of this country to implement serious regulatory change when it comes to pensions.
The raiding of pension schemes, just as Maxwell did, is no longer possible. Admittedly, Philip Green tried his best, however, allegedly he was forced to pay £363 million in cash settlement with the Pensions Regulator to stay out of prison.
What this means in a practical sense is that pensions and every other regulated investment can be trusted in this country. The financial regulatory framework and the relative political stability of the UK allows investors to have confidence that if they are investing, there is an element of protection available.
It also means that ‘pensions’ – by which I mean defined contribution pensions, which make up the majority of the workplace pension schemes now mandatorily provided by every UK employer – can be thought of in the same breath as other ‘investments’. The name pension in this context means that the invested funds are subject to specific rules and tax treatment, but doesn’t change the fact that funds saved in this way are (usually) invested in line with the investor’s wishes.
If you would like to have a confidential conversation about your pension planning, why not arrange a no obligation call with our financial planning partner Integrity365? Customer service is at the heart of everything they do. Email Integrity365 directly for more information.
The checklist to savvy investment and pension planning
Pensions are really tax efficient. If you’re investing for the future – beyond age 55 – then you should definitely be making use of your pension allowances. If you accept that UK pensions are now regulated properly, the biggest restriction on investing this way is that you can’t access your funds again until age 55 (increasing to age 57 from April 2024). I should note that the effective compulsion to buy an annuity with accrued pension funds was removed as of 2011, too, which obviously gives more control to savers over how funds are accessed and helps make pensions a viable investment option.
If you are willing to wait until the age at which you can access your pension funds, then you can benefit from Income Tax relief (from 20% up to 45%) and potentially the reinstatement of your Income Tax personal allowance (an effective rate of relief of 60%) when making contributions. Alternatively, if you’re a business owner then you can make a pension contribution directly from your company before the application of Corporation Tax, and you gain control of ‘your’ funds without a liability to Income Tax or National Insurance, too.
Once funds are held within a pension, then any investment growth or dividend return within the pension is tax free. Investors can also receive the first quarter of their fund back tax free. Further, the subsequent withdrawal of further funds can be managed in line with a saver’s personal Income Tax position. It’s even possible to pass on pension funds to the next generation tax free on death, in some cases.
So, there are plenty of tax advantages to a pension investment, and minimal drawbacks. But there are other options too. Whilst I have extolled the virtues of pensions, the Revenue knows this as well and there are restrictions on how much can be invested both in any given year and over a lifetime of saving, and those restrictions can be severe depending on your situation.
For others, the access age will be an issue. The important thing is to consider exactly what it is you wish to achieve with an investment and put together a solution that is right for you, making use of any and all allowances that are applicable to your personal situation.
It is possible to contribute to an ISA (£20,000 per investor, per year) and receive both tax-free growth within the plan and tax free withdrawals upon access, at whatever age this is required. The idea of the ‘ISA millionaire’ is now a reality, with some couples that have each invested using their ISA allowances each year now having over £1m in their combined investment pot. That is, £1m of tax-free investment.
Furthermore, one can make use of the tax allowances in the UK system. It may come as a surprise to learn that Capital Gains Tax (CGT) makes up just 1% of revenue for the UK exchequer, despite the proliferation of investment property owners we are led to believe are prevalent these days.
One reason for this remarkable statistic is that most people generate the funds they need to live on every day as income. The other is that the CGT allowance is relatively generous in this country. In the current tax year, the allowance is £12,570 per individual – and with tax free transfers between spouses available – that means a married couple could generate growth of over £25,000 every year on their investments and pay no tax.
The main restriction with CGT, is that it is a ‘use it or lose it’ allowance. If an allowance isn’t used in a given year it cannot be carried forward, which makes it difficult to set against illiquid assets – such as property – in any great quality. However, it makes it all the more crucial that the allowance is used each year, and highlights the importance of having sound investment housekeeping and a proper financial plan.
To highlight the benefit of investing in line with a ‘tax savvy’ plan, let us consider an example.
What gross income do you need to earn to receive £100,000 net income?
|Less Personal Allowance||£0|
|£37,700 @ 20%||£7,540|
|£112,300 @ 40%||£44,920|
|£17,619 @ 45%||£7,928|
|Total Income tax||£60,388||(£60,388)|
|National Insurance (£40,702 @ 12%)||£4,884|
|National Insurance (£117,349 @ 2%)||£2,347|
|Total National Insurance||£7,231||(£7,231)|
|SIPP – nothing|
|Offshore bond £36,000 (18 full segments)
| OEIC dividend £5,000 + part disposal £23,654
|Total gross £100,182|
| Allowances used:
|Total tax £182|
| Net income £100,000
Effective tax rate of 0.18%
You will note there are a few allowances listed in the table above that I have not touched on previously. There are a myriad of allowances and solutions available in the UK tax system but, in the interests of brevity, I’ve only considered a few here. Rest assured, the allowances listed in the example above do exist and are available. It’s even possible to claim a capital allowance deduction against income tax and corporation tax, should your business own a boat.
To discuss the best options for you and how you can create the most tax efficient savings plan for your own investments, get in touch with an Independent Financial Adviser to make sure you receive the right advice.
The content contained herein is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or any other advice.
Written by Tom Parry APFS, Independent Financial Adviser/Chartered Financial Planner, Integrity365
Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.