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Tony Wickenden: Pensions pass the tax test


I started my look at “new world” retirement income planning last week. I referenced in that article the importance of taking a wide ranging “all assets” approach to designing a tax efficient strategy to anticipate and deal with the following risks: volatility, inflation, legacy and flexibility. It seems a multi-faceted solution is becoming the strategy of choice and it is not hard to understand why.

Most accept these days there is really little, if any, difference between retirement planning and investment planning. It is just tax efficient management of money through periods of investment and disinvestment.

This position is driven by a combination of factors, including the increasing trend to not retire in a traditional sense but continue generating income. With this in mind, it will be especially important to take into account all of one’s assets in determining where to take funds from.

This consideration will also be important in determining which, if any, wrappers should be used in relation to the amounts being invested. These days you can usually ensure any portfolio be secured through the main retail investments. By this I mean pensions, Isas, UK and offshore collectives, and UK and offshore bonds.

Provided there is comfort in relation to the characteristics of these investments, tax will be an important determinant of which to choose. Consideration needs to made with regards the taxation of the income and gains generated by the investments as well as, of course, taxation of the gains and income realised by the investors.

If we assume that Isas and pensions will be the “no brainer” first selections for most investors then, beyond these (and leaving aside property, cash and VCTs/EISs), choices will come down to UK and offshore collectives and UK and offshore bonds.

These choices will become more relevant once the input allowances for pensions and Isas are exceeded. For pensions, in particular, there is also the lifetime allowance to consider. It currently stands at £1.25m but is set to fall to £1m next year. Various “protections” exist for those holding pension funds ahead of any changes to the lifetime allowance.

While on the subject of the lifetime allowance reduction it is hard to imagine there will be no further changes to pension input limits now that the general election has passed. The economics are compelling. Pension reliefs cost over £20bn net so it is not unreasonable the givers of relief should want to see some change in savings behaviour to justify such enormous expenditure.

Perhaps I will return to this theme in a subsequent article.

But back to the matter in hand. As I have mentioned, when both putting money in and taking it out tax is an important determinant. At the point in life that some funds are required (i.e. to support or replace earned income) it is likely many clients will have investments in a number of wrappers. Advice can have an impact here. The tax difference between taking funds from the various wrappers can really make a difference to the net amount received and thus the capital value of the remaining investments.

Meanwhile, where you take funds from can also make a difference to the amount that remains for the family or dependents of the investor.

If achieving a level of income with minimum tax and retaining the highest possible investable fund are key requirements for an investor then it would at least be worth considering taking benefits from investments other than the pension.

Yet it makes sense that we are drawn to this “default” by virtue of its “extreme” tax efficiency in relation to income and capital gains tax freedom on income and gains generated by the investments, as well as freedom from inheritance tax in relation to the value of the funds. There is also no income tax to consider on funds leaving the pension if the person most recently entitled to the funds dies aged under age 75.

Tony Wickenden is joint managing director at Technical Connection



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