Greg Tyler works in the City, and as a high earner he’s always tried to maximise his pension savings.
But like many other higher earners he’s found his ability to save for retirement has been hampered in recent years.
Tyler is an additional-rate taxpayer. From April next year his £40,000 annual pension allowance will be severely curtailed. Once his income tops £150,000 this annual limit will start to reduce, until it is worth just £10,000 for those earning £210,000-plus. (Of course, the calculation for ‘relevant’ income is complex and it isn’t necessarily just the headline salary that is taken into account).
Tyler is also aware that if the savings he’s made to date continue to grow at a decent rate he could be affected by the lower lifetime limit - which will fall from £1.25m to £1m in April 2016.
He says: “Hopefully by the time I retire my pension funds will have continued to grow in value, so this lower limit could become a problem.”
He’s also concerned that the Government will further restrict this lifetime allowance, which makes him wary about putting more into pensions. “I don’t want to get hit with a tax bill in future, simply because my investments have outperformed.”
Restricted Tax Relief
He’s said he has sought advice about the most tax-efficient way to save for his future from adviser Graeme McColgan of London-based Million Plus Financial Planning.
McColgan says: “We are talking to a lot of customers in a similar position.
“Pensions remain attractive for tax-free growth and inheritance tax planning, however these changes have meant higher-rate taxpayers need to look elsewhere for tax relief on income.” Many people are concerned that this situation could get even worse if a new flat-rate of tax relief – or Pension ISA –is introduced in the March Budget.
McColgan adds: “A few years ago people get tax relief on contributions of up to £225,000 each year. For those on higher salaries or generous bonus schemes this was a good way to provide for their future. But some of these same high earners will soon only be able to get tax relief on £10,000 of pension contributions each year.”
Making the Most of Children’s Pensions
As a result, higher-earners like Tyler are making the most of pensions for spouses and children. They are also maximising pension savings in this tax year ahead of any changes in the next Budget.
The amount that can be saved into a children’s (or non-earner’s) pensions is more limited - up to £3,600 a year. But this on top of their own allowance does allow them to move some funds into a largely tax-free environment — and it can benefit the family as a whole.
Tyler has taken out a couple of pensions for his two children. Although they won’t be able to access them until they are at least 55, he hopes this will provide a financial bedrock for their future.
Tyler says as he is investing relatively modest lump sums each year, but as these will be invested for long periods of time, he says important to keep investment costs and fees to a minimum - as these will have a significant effect on overall returns.
With this in mind he’s invested in one of the funds offered through Standard Life (SL.)’s MyFolio range. He says he thinks this is a cost-effective way to access an aggressively managed passive portfolio.
He said he have invested in their MyFolio Market fund, which has a four-star rating from Morningstar.
Low Cost Fund of Funds
These are managed fund-of-funds with risk-rated asset allocations. For children’s pensions the money will often be invested for 40 years plus, so Tyler says he is looking for a low cost, low maintenance solution, where he doesn’t have to pay large fees to have these investments rebalanced every year.
Tyler says that choosing the right fund is important, but is crucial to ensure his money is invested tax-efficiently. “This will make a far more significant different to the return I get on my money, rather than choosing one equity fund over another.”
With his capacity to save into pensions reduced he’s also looking at VCTs and Enterprise Investment Schemes. He says he’s not quite sure which ones to invest in at present though.
“The tax benefits look attractive, but they are high risk. It don’t want to lose my money, I want to invest it for the future, so I can continue to enjoy a similar standard of living when I stop working. The way the pension rules are being changed though makes this hard to achieve using basic savings schemes.”
What funds are in your ISA or SIPP? What have been your most successful investments to date? If you'd like to feature in Investment Views and tell us about your investment strategy please contact the Editorial team on UKEditorial@morningstar.com
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