With changes to UK annual and lifetime allowances taking effect in less than a year, those wanting to maximise retirement savings must look to alternative tax efficient solutions, according to multi-manager fund platform Kuber Ventures.
Individuals fast approaching or already at the new GBP1.25m pension pot threshold, who are still keen to bolster their retirement savings, could claim back 30 per cent in tax relief on top of returns. In addition, savers unable to make any further contributions to their pension could claim back GBP12,000 on a GBP40,000 contribution through Enterprise Investment Schemes (EIS).
John Williams (pictured), managing partner at Kuber, says: “The government’s latest constraints for people who are working hard to grow ‘gold-plated’ pension pots are disappointing.
“With the new yearly restrictions, numerous people are going to get stung. Unless they consider alternative investment options for contributions of more than GBP40,000, their savings will be significantly impacted.
“Alternative investments are emerging as the leading option for people in this situation with EIS in particular, providing an extremely compelling solution.”
EIS, introduced by the government to help small businesses to raise finance, offer a range of tax reliefs to investors who subscribe for shares in qualifying companies. Income tax relief is available at 30 per cent on the amount invested up to a maximum of GBP1m providing a tax reduction in any one year of GBP300,000.
Williams says: “We find ourselves at a point where people are being penalised for saving for their retirement, which goes against everything that the government has encouraged to date.
“The government’s continued tinkering with pension regulations is unfortunately beginning to undermine confidence in traditional pension planning and those people who work diligently to save must now take a much more holistic approach to putting money aside for later life.
“While interest rates continue to coast along at rock bottom the options are limited for those individuals wanting to avoid huge tax hikes on sizeable investments each year and who want to achieve the required level of income in retirement. EIS are one of the most tax efficient solutions for people facing this problem.”
Along with income tax relief, EIS provide many other tax incentives including Capital Gains Tax (CGT) deferral, loss relief and inheritance tax exemption. Investing in small businesses can potentially provide very profitable gains but it also comes with a level of risk which the tax incentives are designed to compensate for.
To manage risk Williams advises people to invest in a range of EIS managers and companies rather than just one: “To control risk when investing in EIS it is important to build a diversified portfolio across different managers, sectors and investment strategies which is where investment platforms play an increasingly important role for financial advisers and clients.”
The likelihood is that the changes to annual and lifetime allowances will also mean people start putting less money into registered pension schemes and in certain cases opt out of company pension schemes and elect cash from their employer in lieu of pension contributions. An EIS platform solution, potentially facilitated by the employer offers a compelling alternative to receiving a cash payment, which is automatically subject to 40/45 per cent income tax.
