My colleague Neil wrote a blog last week on the “5 options to boost your retirement income whilst minimising tax” and if you haven’t read it, please do.  It is setting the scene of how our clients are investing and drawing their money tax efficiently in retirement.  Our proposition is to pair this knowledge with our investment management.

His blog got me thinking of how important it is to think ahead of time on what you want your retirement to look like.  For my retirement, I am planning to have repaid my capital and interest mortgage and any other large debts.  This fits with who I am as I dislike interest only debts, preferring to see the amount I owe declining over the years.  This means for me to retire, I will be “investing” money each month into my mortgage to bring the debt down and so I won’t need a lump sum of capital to repay this mortgage when I retire.

I also want my retirement to be pre-determined from a capital expenditure point of view.  For instance, I prefer to holiday in different places each year rather than having a fixed place to visit.  So, I am very unlikely to want to buy a place in the sun (unless I move my permanent residence) in my retirement so again I will not be looking for a lump sum.

What I will want is a regular income so how I invest my spare liquidity now is to enhance this long-term income in retirement.  My preferred vehicles of choice for this are currently:

1. A private pension
2. An equity ISA
3. A general investment account (GIA)
4. A VCT strategy

This may look like I am contributing to a lot of different investments all at once, but I am using all of these to enhance my retirement strategy and keep flexibility in case I need urgent capital either before or during retirement. I may not put new capital into each one each year.

Private pension

I have preferred a SIPP with its investment strategy run by Ben Wattam and each year I look to contribute which allows me to reclaim income tax. 

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. 

As the first 25% of each withdrawal can be tax-free, I could draw £65,000 P/A and the first 25% is tax-free with the balance being subject to income tax.  As the first £12,570 would be tax free as my personal allowance, I would only pay income tax at 20% on £36,180 so £7,236.

I would have reclaimed (ignoring any investment growth at all) at least £26,000 of tax in making the contribution in the first place (assuming I could contribute £65,000).

As I am 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.

ISAs

These allow me to save up to £20,000 P/A but do not afford me an initial tax relief.  The accumulated capital is available upon demand and grows income and capital gains taxes free.

It will serve as a top-up strategy for my retirement income needs.

GIAs

These allow me to invest and harvest my annual capital gains tax allowance of £12,300 and so I can invest further capital tax-free on the basis it does not create an income for me.  I have directed these investments at the growth end of the market that do not attract high dividends but rather capital growth.  With annual trading I can use the annual capital gains allowances which avoids me storing up a big capital gains tax liability for my retirement.

Like ISAs, these are available upon demand, and I have the option of rolling these into my ISAs in the tax years I lack the free cash flow to subscribe to the £20,000 allowance.  This reinforces the tax-free nature of the investment. 

VCTs

In the years I do not make pension contributions I have made VCT investments.  These are the highest risk of my portfolio but are very tax efficient.  I receive a 30% income tax relief and tax-free dividends.  Each are locked in for 5 years.

An investment of £21,000 triggers a tax relief of £7,000 (30%).

I am building a portfolio of VCTs for 5 x £21,000 = £105,000.

In retirement I can mature a VCT each tax year and make a reinvestment into a new VCT to trigger a further 30% relief.  I will then use this tax relief to offset the tax I have paid on drawing my pension income (see above) to allow that income to be income tax free.

I will spend the income these make but not the capital which will always be on a 5-year lock.

Summary

The above does not constitute advice and it is important to note that I do not contribute to the above each tax year.  I favour them pursuant to my income that tax-year and the income tax position.

I can create the above as I have made the decision that:

1. I do not want a lump sum in retirement
2. I favour a long-term income that I can flex higher or lower as I need
3. I am comfortable that the investment risk I take now will reward me ahead of and during retirement
4. I need a flexible plan that does not back me into any tax corner either now or in retirement

Secret lovers,