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Client Planning Scenario - Pension

The problem

Over a decade ago a high earners could invest up to £255,000 per year into their pensions and receive a significant percentage back in tax relief. However in recent years the tax benefits available on pensions have gradually been reduced by successive government, particularly for high earners.

Now the annual pension allowance is £60,000 which is then reduced to only £10,000 for those with an income over £360,000 per year and tapered down for those whose income exceed £260,000.

Scenario

Sophie is a surgeon and a high earner therefore she is restricted on what she can pay into her pension due to her high income, her ISAs are already accounted for. Sophie is looking for an alternative way to build her income once she retires in 3 years’ time. Sophie likes the idea of supporting and investing in small UK companies, she has a particular interest in emerging health enterprises.

Solution

Sophies financial advisor suggests she uses a Venture Capital Trust (VCT) which will allow her to invest a maximum of £200k p.a and build an income portfolio prior to her retirement in 3 years. Sophies decides to invest £100,000 of her income per year into a VCT, Sophie benefits from £30,000 up front income tax relief and approx. £5,000 (assuming a 5% dividend yield) income in tax free dividends per year.

Sophie invests for 3 years ahead of retirement which generates a combined income of both tax relief and tax free dividends £105,000. This is a healthy sum for her pension pot, given the Albion VCTs have a 5% dividend target per year meaning Sophie will continue to benefit from approx. £15,000 p.a tax free dividends into her retirement for as long as she holds the VCTs. There is also the added growth prospect of her VCT investment.

Outcome

Sophie’s advisor made her aware that she will need to hold VCTs long term and that her capital will be at risk. However she was in a position to take on this risk and through her VCT investment has offset some of her income tax bill during her last 3 years of employment but also managed to effectively use VCTs to supplement her existing pension. Sophie’s VCT portfolio will now provide future tax free income once she retires.

Long-term

In addition to the potential financial benefits that VCTs offer Sophie has enjoyed supporting early stage UK based Healthcare businesses as well as attending annual VCT investor events such as shareholders seminars during her retirement. Sophie is happy with her retirement fund and also keeping her involvement in the Healthcare sector.

Want to learn more about our VCTs? Get in touch

Bryony Butler

Business Development Manager

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Stuart Mant

Head of Business Development

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