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As the end of the tax year approaches, time is running out for higher-earners to maximise generous pension reliefs. But there are many other ramifications of the pensions revolution the affluent cannot ignore.
We already know that April will see some significant changes to pensions rules that will affect many higher-earners. Speculation is mounting that there will be further changes announced in the next Budget on 16 March 2016. Many predict that the Chancellor will introduce a single rate of pension relief that is considerable lower than that currently available to higher-rate taxpayers. Here, wealth experts highlight their ten top tips for affluent pension savers wishing to make the most of current opportunities and limit the impact of forthcoming changes.
There’s no time to waste. Take stock now if you are a higher-earner
Simon Allister, Head of Wealth Planning at Vestra Wealth, says:
Now is a perfect opportunity for individuals to conduct some pensions ‘housekeeping’. It is imperative to understand the specific benefits and valuations attached to each of your individual schemes in order to determine what actions need to be taken.
For those on higher incomes and/or with larger pension arrangements, it may be prudent to fundamentally alter your existing arrangements in preparation for the forthcoming tax year. Time is, therefore, very much of the essence.
Maximise contributions in the current tax year; use carry-forward
Sarah Lord, Managing Director of Killik Chartered Financial Planners, says:
Significant changes have been made to the amount which can be paid into a pension in the current tax year. These essentially mean that irrespective of the amount contributed prior to the Summer Budget it is possible to contribute a further £40,000 gross before the end of the tax year. This is a one-off opportunity which only applies for the current tax year.
If you have not maximised your pension savings in previous tax years, it is still possible to make use of any unused annual allowance from the previous three years through ‘carry-forward’. The only conditions that apply are for you to have earnings in the current tax year of at least equal to the total gross contribution being paid and you have to maximise your contributions in the current tax year before you can make use of previous years. Drip your money in to the markets.
James Horniman, Partner at James Hambro & Partners, says:
Lots of people seem to be topping up their pensions at the moment, perhaps in anticipation of changes in the rules that people expect to be announced in the March Budget, which could make pensions saving less attractive for many higher-rate tax payers. Just because you’ve put your cash within a pensions wrapper doesn’t mean it also has to go straight into the markets. When they’re so volatile it is sensible to drip feed and buy on the dips.
It’s alright to invest straight away in assets that try to preserve value – like absolute return funds – but if the bulk was going into equities, I would look to invest a third in our best ideas immediately and then see what happens over the next few weeks in case there were opportunities to buy in to stocks and funds on our approved list at better prices. The biggest risk may be taking too little risk.
Pamela Reid, Director of Services Development at Quilter Cheviot, says:
When considering how your pension is invested, remember that your fund will need to support your income for the rest of your life and provide an income to your spouse if you die first. That could be a long time into the future and being too cautious at retirement could increase your risk of running out of money within your lifetime. Your real risk is not taking sufficient investment risk.
You also need to set up investment arrangements that could still work for you in 25 years or more. Think about the type of investment management firm or arrangement and whether it is likely to be active and in business well into the future, and how you will manage the arrangement into your old age.
De-risk for drawdown
Duncan Carmichael-Jack, Partner and Investment Manager at Vestra Wealth, says:
It is important for an investment manager to have a good understanding of both the client’s lifestyle and financial requirements as they approach retirement. Through a SIPP structure, we seek to take on less risk and generate more income through asset allocation for clients who have begun their drawdown. This helps with capital preservation, which is paramount during retirement years.
Rory McPherson, Head of Investment Strategy at Psigma, says:
Taking less risk in retirement does not mean holding 100% in cash or bonds; it’s important to safeguard wealth against inflation as well as being able to pay out a tax-efficient income. We blend together a wide mix of assets to keep risk low and then provide income dependant on each client’s individual circumstances. This may take the form of capital gains or dividends depending on tax circumstances.
If you’re going into drawdown or buying an annuity, examine contract charges carefully
Simon Bashorun, Financial Planning Team Leader (London) at Investec Wealth Investment, says:
Take the time to do thorough research at outset and compare contract costs on a like-for-like basis. The cheapest contract is not always the most appropriate – it is more important to consider what you actually get for the charges, in terms of contract flexibility, investment performance, servicing and support.
Trust the professionals
Lee Goggin, co-founder of findaWEALTHMANAGER.com, says:
The average wealth manager outperformed the markets last year – protecting clients from the worst of the market downsides and delivering more overall on the upside. DIY investing is a lot of fun and if you’re good – or lucky – can be very rewarding. But hopefully you’re going to be retired a long time, so you can’t afford to take unnecessary risks with your pension. By all means, give yourself some money to invest yourself, but unless you’ve got a lot of time to do this properly, seriously consider letting the professionals manage the bulk of it.
If you’ve already got a wealth manager, it’s worth just doing a check on their performance. Are they delivering the service you expect? Are your investment reports clear? Are you happy with the returns they are achieving? This is a big market and there’s a lot of choice out there: have you got the wealth manager that’s right for you?
Stay informed of coming pension changes
Rory McPherson, Head of Investment Strategy at Psigma, says:
Tax planning becomes ever more critical in retirement. Without a regular salary, it’s important to pay consideration to tax allowances across individuals and spouses, gains and income, as well as making full use of ISAs, such that income needs can be met without placing undue stress on the portfolio.
Consider inheritance planning
Simon Bashorun, Financial Planning Team Leader (London) at Investec Wealth and Investment, says:
Review all existing pension contracts and death benefit nominations to ensure that they remain suitable given the legislative changes.
For those with other sources of income in retirement there is an opportunity for pensions to enable assets to pass down the generations tax-efficiently. They are however not a substitute for trust-based Inheritance Tax planning, and the potential pitfalls in this area make professional advice essential.
Stay informed of coming pension changes
Sarah Lord, Managing Director of Killik Chartered Financial Planners, says:
It is widely anticipated that we will see further changes to the pension landscape, but one area that we already know is that for high-earners (classed as those earning £150,000 and above) the amount which can be paid into a pension from next tax year will be restricted. Essentially for every £2 of income over £150,000 the annual allowance will be reduced by £1 (subject to a minimum annual allowance of £10,000). For example, if earnings are £180,000 for pension purposes the maximum which could be paid as a gross contribution would be £25,000.
Therefore, for those likely to be affected by this change, there is the ability to maximise pension contributions in the current tax year through the increased annual allowance and carry-forward.
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Important information
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
