7 Alternatives to using pensions to save for retirement
by Alexander Beard, on Aug 6, 2014 10:28:49 AM
Faced with a hefty 55 per cent pensions tax bill because of HM Revenue & Customs new lower lifetime pensions allowance, many middle-to-high earners with generous pension arrangements are seriously on the lookout for alternatives to pensions as savings vehicles for retirement.
That is quite a few savers potentially hunting around, considering that approximately 360,000 people (according to latest HM Revenue & Customs’ estimates) will face a tax bill equivalent to several years 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 then should you be looking for? You may be pleasantly surprised to find that actually there is a broad choice of attractive alternative investment vehicles and tax wrappers to choose from.
What you need to do is weigh up their suitability in relation to your own particular pension pot. Each of these alternative investment strategies could merit an article on their own, but to summarise:
Spouse / civil partner pensions: Contributing to a pension for a spouse or civil partner can yield a worthwhile return. If your spouse is employed you can pay up to the higher 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.
Maximise tax allowances: Your annual exempt allowance for Capital Gains Tax (CGT) needs to be used every year otherwise you lose it – for good. Realising capital gains on mutual funds on an annual basis ensures that you maximise the benefit of your CGT annual exempt allowance.
‘Mind the gap(s)’ in tax wrappers: make sure you use up all your tax wrapper limits by rechannelling money that can no longer be saved in a pension; high-risk investors may want to look at Venture Capital Trusts, for example.
Defer tax offshore: Tax deferred equals tax saved – if it is done correctly. If you are a higher rate taxpayer now, it can be tax-efficient to invest through an offshore bond. Tax is not due until funds are drawn from the bond – so you can plan ahead for taking gains when paying less tax in retirement, or assigning to a non-taxpayer.
Spread – diversify – reduce tax exposure: Diversifying your investments across assets that are subject to income tax, compared to 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 re-emerging as alternative investment vehicles to pensions as they mirror a saver’s contributions to a pension, but over a shorter time frame. Payments incur only a low tax rate and the fund matures after a set period, typically 10 years.
Because the initial investment is protected, think of it as a short-term endowment that doubles as a life assurance policy.
Retail bonds: Retail bonds – loans that individuals can make to companies including major firms such as RBS or Tesco Personal Finance – are increasingly popular investments. Their advantage is that 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 of 5-6 per cent. You also know exactly when, provided the company remains sound, your capital will be returned – a welcome certainty.
The value of your investments and income earned from them can go down as well as up. You may not receive back the full amount of your original investment.