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Maximising retirement income – a suggestion from Downing


From 6 April 2016, the government introduced changes to the pension tax relief system, including a new annual allowance taper for higher earners that reduced the maximum annual contribution eligible for tax relief.


Since that date, clients with a gross income above £150,000 per year will have seen their annual allowance reduced by £1 for every £2 of excess income.

The maximum reduction is £30,000 and will be reached by clients with income of at least £210,000, resulting in an allowance of just £10,000 in the 2019/20 tax year.

For example…

Anthony is 58 years old and earns £250,000 per year, making him an additional rate tax payer. He has historically made an annual contribution to his pension of £40,000 a year. However, with the annual allowance taper his annual contribution for 2019/20 is reduced to £10,000 (at a net cost of £8,000, including 20% pension relief at source). Anthony would like to continue investing £40,000 a year for retirement, so he decides to speak to a financial adviser.

A potential solution

Anthony’s adviser suggests that he could complement his pension pot by investing in a venture capital trust (VCT). VCTs invest in smaller companies that aren’t listed on a major stock exchange, so they are higher risk than typical pension funds. However, VCTs offer 30% income tax relief (up to a maximum subscription of £200,000 per tax year) and the potential for tax-free growth and income.

Anthony decides to invest £10,000 in his pension and £30,000 in a VCT in 2019/20. This will mean he makes his usual gross contribution of £40,000, as well as providing 30% income tax relief plus tax-free income and growth on the VCT. Anthony also decides to reinvest any dividends while he is still working, so he can take them as tax-free income during his retirement.

*As an additional rate taxpayer, Anthony could claim an additional £2,500 of tax relief back on his pension contribution.

The example set out above is for illustrative purposes only. Capital is at risk and returns are not guaranteed. Tax reliefs are subject to personal circumstances, the VCT maintaining its qualifying status and are subject to change. VCTs are long-term investments and shares should be held for a minimum of five years to qualify for the available tax reliefs.


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