Comment: Jonathan Brownlow on planning for funding retirement
There was a time when reaching state pension age and retiring, in the traditional sense at least, would co-incide. Now, though, the line between working and retirement has blurred.
Many people of pension age might be starting a business, or using skills and experience from a successful career to help other entrepreneurs.
For some, retirement might mean taking on caring responsibilities for grandchildren or even their own parents.
People are living longer and “pots” need to last longer, and be flexible enough to accommodate these changing needs. Reducing the impact of tax will help to improve the longevity of assets.
This starts with creating tax-efficient environments in which money can grow, taking advantage of the various tax reliefs and allowances that are available, and making withdrawals with the lowest tax implications.
Since the introduction of caps on how much can be paid into a pension and how large it may grow, a pension alone will not provide many people with sufficient income and capital for their desired lifestyle in retirement.
Pensions do still have a place because the cost of putting money into one is currently reduced by tax relief and the investments grow tax-free.
A tax-free lump sum is available at retirement, with any income from the rest of the fund taxable when it is received. However, a number of other solutions are commonly used to complement pensions:
A portfolio of investments enables various personal tax allowances to be used.
Individual savings accounts (ISAs) allow UK taxpayers to shelter investment income and gains from tax and can be invested to provide a tax-free income, while withdrawals do not attract capital gains tax (CGT).
For people willing to take more risk, venture capital schemes offer up-front tax relief as an incentive to invest in growth-stage businesses, as well as an exemption from CGT on the disposal of shares. Dividends paid by venture capital trusts are tax-free, and enterprise investment scheme (EIS) shares may qualify for an exemption from inheritance tax (IHT) under business property relief (BPR) rules.
Investment bonds (life insurance policies designed to hold investments) provide another shelter from tax within which investments can grow more efficiently. CGT is not paid on the disposal of investments, and no further income tax is charged on interest and dividends within the bond. The policyholder can withdraw up to 5 per cent of the initial investment each year without an immediate tax liability, deferring tax on any gains until a future point.
Much has been said in the press during the past 12 months about transferring defined benefit pensions, also known as final salary schemes, to take advantage of the rules available to more flexible personal arrangements, and the larger transfer values being offered by schemes. Individuals’ needs will guide what is most appropriate for them.
It is therefore important to understand what is being given up when transferring, and whether the guarantees offered by the scheme could play an important part in your retirement plans when combined with other solutions.
This article appears in the AUTUMN 2017 edition of Vision Scotland. Further information about Vision Scotland here.