Let’s look at how we could implement the ideal strategy for Arthur and his family:
- Arthur is 50 years old and has recently returned to England following a lengthy period of working abroad.
- His new role in the UK comes with a £160,000 salary with 10% total pension contributions (5% employer and 5% employee).
- Arthur has a current income requirement of £50,000 net per annum.
- He has a target retirement age of 60 with a desired income in retirement of £60,000 net per annum.
- Arthur has no existing pensions or savings.
The position Arthur would be in at 60 without additional planning would be £207,043 in pension savings from his workplace scheme (assuming a 5% net return per annum) and £444,345 in cash-based savings (assuming 2% net return per annum). This would sustain Arthur’s income requirement in retirement for around 10 to 11 years depending on the tax due. Some way short of a sustainable retirement strategy!
An alternative would be to use some of the surplus cash to make personal pension contributions up to the maximum of £60,000 per annum (minus the existing workplace contributions of £16,000 per annum). This would provide a significant boost to his pension savings, while the additional tax relief the contributions would attract would also improve his overall position, some of which is an effective rate of 60% as some of his income tax personal allowance is returned to him. This would leave Arthur with £776,411 in pension savings and £97,814 in cash-based savings. His retirement income would then be sustainable for 14 to 15 years, again depending on the tax due. Getting better!
If we take this a step further and add Venture Capital Trust investments (VCTs) into the strategy, we can use the additional tax relief they offer (30% of the investment amount) alongside their tax-free dividend stream (typically around 5% per annum – reinvested until the point of retirement) to build on this. Rather than the surplus £5,386 in net income per annum Arthur has been using to build a cash-based holding, this could result in a VCT portfolio of £68,404 at age 60. This is based on an £5,386 investment in year one and a £7,002 investment in subsequent years by adding the tax relief from the previous year’s subscription assuming no change in the VCT valuations. This alone would add a tax-free income of £3,805 per annum in retirement with the additional possibility of capital growth on the VCT portfolio, adding at least another two years to the time that the required income is sustainable.
Of course, the appropriateness of any strategy is dependent on the individual in question and their appetite for investment risk. Ongoing reviews would be required throughout both the accrual phase and the drawdown phase to ensure its suitability and efficiency in the face of changes in Arthur’s circumstances or relevant legislation. However, by improving tax efficiency and reducing exposure to cash, the strategy has added five to six years to the time Arthur can receive his desired income.
This is still some way short of what would be considered a sustainable retirement strategy but does illustrate the importance of planning and the earlier this is started the better.
Content correct at time of writing (December 2024).
This article was written by Wealth Management Consultant Thomas Duckworth.
This article has been produced for information purposes only. It is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances and one must satisfy certain investor criteria before being considered eligible to invest. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods Limited and may be subject to change. Your capital may be at risk and past performance is not a guide to future returns. Mattioli Woods Limited is authorised and regulated by the Financial Conduct Authority.
