As we approach the end of the 2016/17 financial year it is worth reminding ourselves of the numerous allowances and reliefs, available to all UK investors, that will be lost if not used on or before the 5th April.
Tax relief is currently offered at the investor’s marginal rate of income tax and National Insurance savings are also available on any contributions made via a workplace salary sacrifice arrangement.
This up-front tax relief, when combined with the tax-efficient investment growth and, under current legislation, a 25% tax-free lump sum payable at retirement makes pension investment a highly attractive proposition, particularly for higher earners.
My last point, however, is not lost on a Government that is still trying desperately to balance the books and which is committed to ‘making Britain work for everyone’.
A clue to what might lie ahead for tax relief on pensions was contained in the small print of last year’s Autumn Statement:
‘The cost of tax and National Insurance contributions relief on pension savings is one of the most expensive sets of relief offered by the government. In 2014 to 2015 this cost around £48bn, with around two thirds of the tax relief going to higher and additional rate taxpayers.
‘… The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources focus where there is most need.’
The Treasury has denied this means the Chancellor is proposing to abolish these expensive reliefs, but my view is that anyone able obtain higher or additional rate tax relief on contributions this year should make investing in pensions a high priority.
It is also important to bear in mind the possible impact of the annual and lifetime pension allowances, however. For most people, the annual allowance is £40,000 (plus any unused allowances from the previous three years), however there are now two circumstances where the standard allowance does not apply: the tapered annual allowance for higher earners and the money purchase annual allowance (MPAA).
A ‘higher earner’ in this context might include anyone with taxable income exceeding £110,000. The MPAA applies to anyone who has previously drawn any income benefits under the current flexible pension rules; either flexi-access drawdown or uncrystallised funds pension lump sum (UFPLS).
For anyone who does not want to tie his or her money up until the minimum retirement age, the ISA is likely to be the ‘go-to’ product. The standard annual ISA allowance is now £15,240, and will be increasing to £20,000 in the 2017/18 Financial Year. Add to this the Lifetime ISA allowance of £4,000 (for those under the age of 40) and the fact that cash ISAs can now be converted to Stocks & Shares ISAs, and it is clear that a sizeable tax-efficient investment portfolio can now be built up over time.
Capital Gains Tax (CGT)
CGT on other investments (excluding residential property) has been reduced to 10%/20% for Basic Rate/Higher Rate taxpayers respectively. Despite these reductions, is still worth considering whether or not to realise capital gains at this time of year to make the most of the annual £11,100 CGT exemption.
Higher Risk Options
Other investments such as VCT, EIS & SEIS also enjoy a range of Income and CGT reliefs, but are not for the inexperienced or faint-hearted investor, as there is a significantly higher risk of capital loss.
As always, it is important to not let the tax tail wag the investment dog, so to speak, however the annual 5th April deadline will, as usual, serve as a useful focal point for anyone looking to invest efficiently.