With the tightening of tax relief on pension contributions for people with income over £130,000, and the proposed blanket restriction on pension contributions from next April, are ISAs an alternative for long-term savings?
ISAs have tax concessions; you pay in out of taxed income, but the growth and output are free of tax.
Money invested in an ISA can be accessed at any time giving you control over your money which could make ISAs an attractive option.
With the removal of higher rate tax relief on pension contributions for those with total earnings over £130,000 what options do you have?
Pensions
You can make a contribution of £20,000 (or £30,000 if you have made large single contributions in the past) this tax year , which will benefit from higher rate tax relief. The coalition government is currently consulting on pension rules and it's looking likely that from next tax year the annual allowance will be reduced which means the maximum contribution will be somewhere between £30,000 to £45,000. We'll have to wait and see.
If you are on the cusp of £130,000, look at your income sources. Consider diverting savings income to a lower earning spouse/civil partner. You can also consider gift aid to reduce your earned income (well for the moment anyway).
Can you contribute to a spouse/civil partners pension instead, eg husband and wife own company, make pension contribution in wife name only?
ISA
Max out your ISA allowance. You can invest £10,200 now in ISAs , that’s £20,400 for a couple. £5,100 in cash and £5,100 in stocks and shares ISA. It is better to do this at the beginning of the tax year as opposed to the end. Clients often think this doesn't amount to much, but if a married couple both did their ISA allowance for 10 years and achieved 6% growth during that time, you would expert a fund of c. £285,000.
Stocks an Shares ISAs grow free from Capital Gains Tax and if you take home an income, it is not added in when working out your income tax bill.
(Also useful for things like age allowance when you're retired)
Venture Capital Trusts (VCT)
Offer 30% tax relief on the contribution, maximum £200,000.
This is high risk as they are investing in SME companies, having said that some providers are catering for concerns by concentrating on structures that preserve your capital to give you the requisite return. You need to hold them for five years to keep the tax relief. A rolling plan programme is worth considering
Offshore Bonds
For lump sum investments, it can be worth considering bonds, growth is taxed as income, but the liability comes at the point when cash the investment in, so if you go from being a higher rate tax payer to a lower rate tax payer you can mitigate some of the tax, or even better assign (sign it over) it to a spouse who might not pay any tax at all, or the children when they go to university (they have got to be eighteen for this to work).
This is a snapshot as opposed to definitive list and there are other options available. The point is to explore a variety of tax wrappers, and with careful planning keep share less of your returns with the tax man.
Anne McClean is a senior Financial Adviser at Nightingale Associates. The views given in this blog are personal to the author. If you would like to discuss the contents of this post with Anne you can call her on 020 7353 1597.
M&H LLP trading as Nightingale Associates is authorised and regulated by the Financial Services Authority.
This year’s Budget proposed changes to the regime for tax relief on pension contributions. Essentially the proposal are that from 2011 higher rate tax relief will not be available to those with income over £150,000. To prevent a rush of people making large contributions before 2011 the Budget also proposed some anti-forestalling measures. These effectively capped the amount on which you could get higher rate relief to £20,000 unless you were already making regular contributions of more than that.
One of the problems with this was that 'regular' meant contributions being paid quarterly or more frequently. As a result many, such as the self employed, who paid annual contributions stood to lose out. It seems that the Government has listened to the arguments and moved their position a little. The Finance Bill has now been amended so that, for infrequent contributions (ie less than quarterly), an average can be taken over the last three tax years subject to a cap of £30,000 instead of £20,000.
The Financial Secretary to the Treasury (Stephen Timms) said in the Parliamentary debate that he would be consulting with the pensions industry about introducing regulations to be more flexible in respect of those who had set up new pension arrangements on or just before Budget day and those who change pension providers and carry forward exactly the same pension arrangements.
It is expected that the Finance Bill will receive Royal Assent later this month.
Barry Hallam is a tax adviser and a Senior Manager at Mercer & Hole. The views given in this blog are personal to the author.
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