Exceeding lifetime pension allowance
When a client makes regular contributions to their pension over a number of decades, they may find themselves exceeding the £1.07 million lifetime allowance (LTA) by the time they retire – even if they only have a modest amount of money in their pension today.
This tax-planning scenario shows how investing in a Venture Capital Trust (VCT) could complement your client’s existing pension and retirement planning strategies.
Build appropriate strategies for your clients
This scenario might be useful for clients who:
- are looking for tax-efficient ways to invest
- are thinking about retirement
- are likely to exceed their lifetime pension allowance
Things to keep in mind
- Nothing in this scenario should be viewed as advice.
- Any suitability decisions should be based on a client’s objectives and needs, as well as their attitude and capacity for risk.
- Advisers should consider the value, eligibility and timings of tax reliefs and liabilities.
- Advisers should consider the impact of charges relevant to any product they choose.
Sarah needs a tax-efficient way to invest for retirement
Sarah has been paying into her pension since she became a consultant 20 years ago. Over the years, she’s built up a sizable pension pot.
Now that the lifetime allowance (LTA) has been reduced to £1.07 million, Sarah’s worried about exceeding this amount and facing a tax charge of up to 55% on the excess.
To make sure this doesn’t happen, Sarah wants to find alternative ways to invest for retirement without increasing her current tax liability.
Sarah’s financial adviser suggests investing in a VCT
Sarah talks to her financial adviser, who makes an assessment based on:
- her risk profile
- her investment time horizon: more than five years
- her attitude towards investing in smaller companies
Based on those factors, Sarah’s adviser suggests investing in a Venture Capital Trust (VCT).
With a VCT, Sarah can claim up to 30% income tax relief on up to £200,000 invested in any single tax year, as long as she holds her VCT shares for at least five years. Sarah can also benefit from tax-free dividends, and won’t have to pay capital gains tax when she sells the shares.
As well as delivering upfront tax relief on investments, having access to the money invested in a VCT after only five years can be attractive for those who may want to access it before they retire or for those who may want to re-invest the money in another VCT for additional upfront tax relief after the initial five years.
Risks to remember when investing in a VCT
- VCTs aren’t suitable for everyone. They’re high risk and should be considered as long-term investments. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest.
- Tax treatment depends on individual circumstances and can change in the future. Tax reliefs also depend on the VCT maintaining its qualifying status. Tax relief is available on investments of up to £200,000 per year.
- VCT shares could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
An overview of VCTs
VCTs were first introduced in 1995 and they’ve grown in popularity since. They’re a good fit for investors who:
- already have personal pensions and Individual Savings Accounts (ISAs)
- are comfortable with higher risk investments
VCTs have a different risk profile to pensions and ISAs and shouldn’t be compared on tax reliefs alone. A VCT isn’t likely to be suitable for investors who:
- need guaranteed income
- can’t tolerate loss
- want to keep immediate access to their money
Tax benefits of investing in a VCT
Here’s an example that shows how Sarah could reduce her income tax bill by investing in a VCT, compared to an ISA or pension.
Things to remember about this example
- This example doesn’t take into account any initial fees or ongoing charges.
- Before investing in a VCT, investors should read the product prospectus and Key Information Documents (KID).
Interested in VCTs?
We’re the largest provider of VCTs in the market, offering three types of
investments that can provide attractive tax reliefs.
Octopus AIM VCTs
Octopus Apollo VCT
Octopus Titan VCT
About Octopus
We’re a financial services provider with a difference. Our main goal is to help people plan for their financial future, so we’ve built market-leading positions in tax-efficient investment, smaller company financing, renewable energy and healthcare.