Maximise Your ISA Contributions
Generally a no-brainer! UK residents aged 18+ can invest up to £15,240 each and parents can also fund a junior ISA or child trust fund with up to £4,080 per child – making a total of £38,640 for a family of four before 6 April 2016. These are use it or lose it allowances, BUT you can use your allowance this year and withdraw it in the future without losing it. Call us to lock in your ISA allowance and if you wish, set up your 2016 contribution at the same time.
Maximise Your Pension Contributions
Tax relief on contributions into a pension is available at your marginal rate up to the lower of the annual allowance of £40,000 or 100% of your income. A £10,000 gross contribution only requires £6,000 from a 40% taxpayer.
With access to your pensions from 55 it now makes even more sense to use available capital or income to maximise your contributions every year.
If you have unused allowances from previous years it is actually possible to contribute up to £180,000 this tax year and obtain tax relief on the whole lot. From April 6th 2016 the maximum annual contribution allowance of £40,000 will be reduced by £1 for each £2 you earn over £150,000 and so if this applies to you, talk to us urgently.
Pensions For Children/Grandchildren
Many of our clients pass on their wealth by making annual contributions of £2,880 every year into Pensions for children and grandchildren. Each £2880 grows to £3600 thanks to tax relief courtesy of HMRC which provides you with an immediate 25% return!
This can make a huge difference to future generations, and the earlier contributions start the more they benefit from compounded tax free returns. For example, if pension investments grow at a net rate of 9% every year, investing £2,880 a year for a 10 year old could build the maximum allowable pension pot of £1 million by the time he or she reaches age 68!
Exchange Salary For Pension Contributions
Pension contributions made by an employer are very tax-efficient for the employer and the employee. If you own the company, pension contributions are an excellent method of extracting profits.
By mutual agreement with their employer, an employee can exchange some of their remuneration (salary or bonus) in return for a larger pension contribution from the employer. This saves on NIC that would have been paid by both employer and employee so it’s a win/win.
From April 2016 Tax Year, this may become less attractive for clients earning over £110,000 net so talk to us about a strategy whereby employees exchange income to take them below the £100,000 threshold in return for a tax free pension contribution made by their employer.
Enterprise Investment Schemes and Venture Capital Trusts
Investments in qualifying EIS companies in 2015/16 attract income tax relief at 30% on a maximum annual investment of up to £1 million for qualifying individuals. It is possible to carry back up to 100% of investments into qualifying EIS companies to a previous tax year: so a carry back claim made for a 2015/16 investment would reduce tax liabilities for 2014/15, accelerating tax relief.
Buying units in Venture Capital Trusts (VCTs) is higher risk than many other investment choices as VCTs are required to invest in smaller companies that are not fully listed, however, they offer a range of tax benefits.
Income tax relief at 30% is available on qualifying investments of up to £200,000 for 2015/16 and dividends received from the units are tax free. In addition, the VCT can buy and sell investments within the trust without suffering CGT and there is no CGT payable on any gain made when you sell the VCT units.
EIS and VCT investments are frequently high risk, please discuss these with us.
At the moment, if you are aged 55 or over, you have the potential to access your pensions and drawdown is an option. You do not need to take income from your pension immediately, you could just to take your tax free cash entitlement (entirely or in part) and designate the remaining funds for an income later.
Individuals in defined benefit (final salary schemes) may not have these flexible options and may want to consider switching out of their current scheme and into a personal pension to achieve this flexibility. However, depending on the terms of the particular defined benefit scheme concerned, the cost of such a switch could be prohibitive.
Always take advice from an independent financial adviser before any such transfer takes place.
Protect Large Pension Funds
Although funds invested in a pension can grow tax free, there is a “Lifetime Allowance” (LTA) limit on the total amount you can hold in your pensions before being hit by additional tax charges when you take benefits. This limit applies to the total value of all your pensions, both company and personal.
Affected clients can elect for ‘individual protection 2014’ (IP14) but the option to make an IP14 election will end on 5 April 2017. If the total of all your pension funds is likely to be more than £1 million by the time you retire, ask us whether opting for IP14 is appropriate.
Balancing your estate through gifts between spouses or civil partners, and gifts to other family members can be very tax-efficient. You could consider giving assets to other family members whilst you are still alive but for significant amounts, trusts should be considered. Trustees can invest, trade and provide financial supervision for family assets with the trust, and protect the interests of family members from minors to the elderly. In many cases, you can also be one of the trustees to keep a close eye on matters.
Regularly updating your Wills & Trusts as circumstances and tax rules change is essential, especially if your estate will be valued at more than £650,000 on death.
Lastly, we are arranging Powers Of Attorney for an increasing number of clients to provide peace of mind that their investments are not locked away if they lack mental capacity at some time in the future or no longer wish to make decisions for themselves.
The information provided in this article does not constitute a personal recommendation for any product or service. Pensions are a long term commitment. You may not be able to access you pension funds until the age of 55. Investments can go down as well as up and you might not get back your initial capital. Pension and tax legislation does and can change in the future which could impact your pension.