Member Article

Targeting retirement: Alternative investments for high earners

A firm of finance experts is warning high earners not to get swept up in the excitement of the “pensions revolution”, and overlook the lucrative alternatives when the next wave of pension changes come in this year.

Currently, many middle-to-high earners with generous pension arrangements enjoy a big tax break when they pay into a pension, with high earners getting the greatest perk. However, the latest figures from the Financial Conduct Authority (FCA) has found that 68% of pensions accessed between July and September were fully cashed out. In anticipation of the pension reforms that will come in from April, many big investors are now seriously on the lookout for alternatives to pensions as savings vehicles for retirement. But the FCA figures also revealed that 42 per cent of people going into drawdown plans during this time, did so without taking regulated advice.

According to latest HM Revenue & Customs’ estimates, somewhere in the region of 360,000 of these savers 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 from April 2016.

What then should you be looking for? According to Phil Morris, head of distribution at Gale and Phillipson, 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.

Phil said: “What you need to do is weigh up their suitability in relation to your own particular pension pot. Access to, and reliance on, final salary pension schemes is on the wane, and buy-to-let investments look to be going the same way.

“It also helps to have a target in mind, and a professional adviser can help. A recent report from Old Mutual Wealth found that the average retirement income is 49% higher for retirees who used a financial adviser and set a retirement target.”

However, Phil is keen to point out that investors need to be vigilant. He said: “These days there’s now more scope than ever to arrange your finances the way you want them. That flexibility is great, but it comes with a new level of personal responsibility that means the financial decisions you make need careful consideration. What is crucial is that you approach withdrawing your money in an informed and tax-efficient way.

Figures have emerged indicating that the amount defrauded by pension scams has risen from £1.4m to £4.7m since last April - a 235% increase in just 10 months.

Phil said: “Hundreds of millions of pounds could have been lost through costly mistakes in the way people manage their retirement funds. On top of that, we are seeing increasing numbers of people falling prey to scammers, offering inappropriate, high risk and often illegal investments.

“People who want to buy an annuity are also losing out by failing to shop around for the best deal, instead going for what they see as the ‘simple’ option through their pension provider. It’s essential to obtain the right professional financial advice to ensure that you access your pension safely, without unnecessary costs and a potential tax bill.”

Phil gave the lowdown on his top alternatives to using pensions to save for retirement:

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, with the usual annual allowances applying.

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; experienced igh-risk investors may want to look at Venture Capital Trusts, for example.

Defer tax offshore: Tax deferred may result in 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 pension contributions limits. Growth and realised maturity incur only a basic rate of tax rate and the fund matures after a set period, typically 10 years.

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.

Specialist Investment Schemes: Specialist investments (Hedge funds, Venture Capital Trusts, Enterprise Investment Schemes, etc) tend to be less appropriate and/or accessible for mainstream investors but can provide innovative investment solutions that offer flexibility and choice to make the most of your retirement savings.

For more information, factsheets, guides and videos, visit the Gale and Phillipson resource library at www.galeandphillipson.co.uk/resources

This was posted in Bdaily's Members' News section by Gale and Phillipson .