I wrote in October last year on what planning my wife and I were looking to put in place for our family for our financial future and I thought I would revisit this at the mid-way point for the year to give a few more ideas we’ve had lately.

To recap, our overall objectives are:

1. To be debt free by retirement
2. Have investments that we can call upon to replace our employment income
3. Support our daughter Emilia (and maybe more) with a fund for them to use as they see fit for their education or a first house.

The specific tax wrappers we are using:

1. A private pension (SIPP)
2. An Individual Savings Account (equity ISA)
3. A Junior ISA (JISA)
4. A general investment account (GIA)
5. Venture Capital Trusts (VCT)

To achieve the above we are repurposing some of our capital to pick up tax reliefs.

On top of the above we are looking to move house in two years and so we are increasing our cash reserves to help with the costs of the move, stamp duty, new furniture etc so there is less cash now to save than previous years.

What we have looked to do is hold true to the below thoughts but work with funds that are already invested rather than injecting new cash (two years is just too short to be taking market risk).

Private pension – no contributions yet

I have a WKM SIPP which is invested into a growth strategy run by Ben Wattam and whilst the markets have been challenging in this space in recent months, the rebalancing work we have been working on is now taking advantage of some simple but powerful mispricing right now.  The timeline for most of my SIPP investments is beyond my retirement date as I plan to draw from different investments in my SIPP during retirement.  Some will support my income early on in retirement and some later.

To recap, my strategy here is to reclaim tax at a higher rate than I will eventually pay back to the Government when I retire (pension incomes are taxable at income tax rates).  In short, I want to reclaim tax at 40% and only pay 20% back when the pension is in payment.  When I build in the 25% tax-free lump sum I can draw gradually in retirement, my marginal tax rate in retirement is only 15% when drawing from the SIPP.

The recent budget reconfirmed this is still inheritance tax free so a further tax benefit for our family.

As a limited company director, it saves me more personal and corporation taxes to have my employer make the contribution for me.  A subtle difference but saves us both National Insurance on the contribution of a further c. 17%.

As I know I need £65,000 back P/A from my pension, I am targeting a capital fund of £1,000,000 as this fund should sustain an income of the above for my lifetime from retirement to death.

For now, we have reviewed the pension fund investments with Ben, and it remains on course.

GIA’s – coming to an end for us

These are non-tax privileged investments, but we can offset the capital gains using our annual capital gains tax allowances.  These allowances have been reduced from £12,300 to £6,000 this tax year and down to £3,000 next so they are quickly running out of tax-free returns for us.  Under current tax rules they no longer fit with our planning and so we are making the following changes:

Saving for Emilia – a JISA

1. We wanted to begin an investment fund for our daughter Emilia but were conscious committing cash at this time takes funds away from our house purchase and so we sold £9,000 worth of investments in the GIA and funded her JISA for the current tax year. I will manage the JISA (via Ben) until Emilia is 18 when she will be able to pick this up herself.  I hasten to add there will be some hefty financial education for her to understand the power of budgeting your money well!

Continued ISAs for us

2. We also wanted to keep pushing on with our ISAs and so we moved £20,000 each from our GIAs into our ISAs. To do so we had to sell the investments and rebuy under the ISA (legally it’s the only way it can be done) but it did allow us to create some capital gains tax losses but rebuy the same investment (known as Bed and ISA) so not missing out on time in the markets.  These paper losses could be valuable in the future as we can carry them forward indefinitely.

VCT for me

3. Finally, I considered selling more GIA shares and investing in my SIPP to mitigate part of my income tax liability for the year but instead opted for a VCT investment for £20,000.

Deferred pension contributions with double income tax relief

A  VCT investment generates a 30% upfront tax relief which will reduce my balancing payment on my self-assessment account in January 2024 which is less tax relief than my pension which would have generated (a 33.75% relief). In January I can reduce my tax bill by £6,000.

The VCT funds are available after 5 years at which point, I will be able to sell the shares, keep my tax relief, and place a pension contribution to trigger full income tax relief at around the 40% relief.

A total of 70% tax relief on the funds.

As my appetite for investment risk is high, this should work well as I can chose when to sell the VCT shares and will look to do so after their 5 year anniversary and I have a 40% tax liability.

Summary

The above does not constitute advice and it is important to note that the above is very specific to my circumstances but hopefully demonstrates that embracing investment risk alongside tax planning can be extremely rewarding in the long-term.

Your financial planning is not always about one tactic but a combination of them which will vary on your journey towards and during retirement.

Enjoy the journey double tax relief lovers ❤