Retirement planning for high income earners

Drawing an income from your pension can be complicated, with a lot of elements to consider, seeking professional advice can make all the difference in meeting your objectives in retirement. 

If you don’t need to draw the income, there are other options, including simply leaving the fund intact, to be inherited following your death. You could also consider making gifts to individuals or to charity. As pension benefits usually fall outside of the inheritance tax net, they can be a highly tax efficient way to pass funds down the generations. 

ISAs allow you to place £20,000 each tax year in a tax-free wrapper (£40,000 for a married couple or civil partners), and the compounding effect plus a supportive market over time can make a real difference.

Gifting a portion of your investments to your spouse or civil partner could save you both tax. It enables you both to optimise your individual tax positions and allowances, potentially enhancing your overall financial position.

An ‘offshore bond’ is an investment wrapper set up by a life insurance company in a jurisdiction with a favourable tax regime, such as the Isle of Man or Dublin. The growth in the investments held in the bond is not subject to UK tax although gains on withdrawal may be subject to income tax. As this type of investment offers the opportunity to defer tax it makes it a useful way to top up your retirement savings.

You can take out up to 5% of your original investment each year for 20 years without incurring an immediate income tax liability. If you don’t use the full 5%, it accumulates for future years, allowing you the potential to choose when to incur an income tax charge.

In the future you may be able to gift part or all the bond to family members to help with estate planning. Any taxable gains will be based on their individual tax rate, which could be beneficial if this is more favourable than your own.

Venture Capital Trusts (VCTs) are run by fund managers and typically invest in unquoted and/or smaller AIM-listed companies – a sub-market of the London Stock Exchange. Enterprise Investment Schemes (EISs) are direct investments in unquoted companies.

Both EIS and VCT investments attract tax reliefs, provided the investment managers keep to certain rules, but also carry a high level of investment risk. There are limits to how much you can invest and the tax relief available is subject to a minimum holding period.

Investments in VCTs and EISs are high risk as they invest in small companies with shares that are highly illiquid and can be hard to sell. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. They attract tax relief provided the underlying managers keep to certain rules.

A family investment company, a limited company whose shareholders are family members, often funded by the founder via a loan, can be a tax-efficient way for high income earners to invest. Income generated by the company will be subject to corporation tax, currently 25%, and shareholders only pay tax when the company distributes income.

This is a complex area requiring specialist wealth planning and tax advice.