Retirement planning for high income earners

Little stands still in our world. The same can be said for the pensions landscape, as rule changes over the years have made retirement options for high income earners more difficult to navigate.

High earners face even more restrictions and potential pitfalls, making it vital to understand the rules and seek specialist wealth planning advice. Calculating your ‘adjusted income’ for example, can be complicated but your Wealth Planner can do this for you. You could also be affected by the annual allowance (currently capped at £60,000) and the tapered annual allowance (which can reduce to £10,000 for individuals with ‘adjusted income’ over £260,000).

You can read more about the pension rule maze and how easily high earners can get caught by the legislation in our article on complex pension rules.

Luckily, there are tax-efficient options available to high earners wanting to save for retirement.

1. ISAs

Since launching, ISAs have been a phenomenal success story. A few years ago, research identified more than 1,000 ISA millionaires in the UK and this number has certainly expanded since. ISAs allow you to place £20,000 each year in a tax-free wrapper and the compounding effect plus a supportive market over time can make a real difference.

2. Spreading investments between spouses

Putting a portion of your investment capital in your spouse’s name can make a lot of sense. It allows each of you to take advantage of your respective tax positions and allowances and could boost your net position.

3. Offshore bonds 

An ‘offshore bond’ is a tax-efficient investment wrapper set up by a life insurance company in a jurisdiction with a favourable tax regime, such as the Isle of Man or Dublin. Because any growth in the investments held within the bond is not subject to UK tax, it can be a useful way to top up retirement savings, although foreign taxes may be deducted at source. 

It is possible to withdraw up to 5% of your original investment each year without incurring an immediate income tax liability, until 100% of the original capital is returned. If the 5% allowance is not used in a given policy year, the unused allowance carries forward to the next policy year on a cumulative basis. This enables you to select the most opportune time to incur a tax charge.

If your investment strategy or circumstances change and you need to switch your underlying investments you will not incur any tax liability – unlike in the UK, where there is a capital gains tax (CGT) liability when selling or buying investments in a general investment account.

If you need to surrender an offshore bond policy, you can choose the most advantageous time to help manage the level of tax eventually paid and you can also choose to assign segments of the bond to other family members to help with income tax and estate planning. When portions of the bond are assigned to someone, the chargeable gains are taxed at their individual income tax rate, which could be particularly beneficial if they are a non or basic rate taxpayer.

4. Venture capital

The government seems to be committed to making the UK one of the best places to start, finance and grow a business in Europe. Incentivising private investment into smaller businesses through enterprise investment schemes (EIS) and venture capital trusts (VCT) is part of this strategy.

VCTs are companies listed on the London Stock Exchange. They are run by fund managers and typically invest in unquoted and/or smaller AIM-listed companies - a sub-market of the London Stock Exchange. EISs are direct investments in unquoted companies. EIS and VCT investments attract tax reliefs – provided the investment managers keep to certain rules but also carry a high level of investment risk. There are limits to how much you can invest and the tax relief available is subject to a minimum holding period. EIS and VCT investments are complex and therefore specialist wealth planning advice is required.  

Investments in VCTs and EISs should be regarded as high risk as they invest in small companies with shares that are highly illiquid and can be hard to sell. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. They attract tax reliefs provided the underlying managers keep to certain rules. 

5. Family investment companies 

A family investment company – a limited company whose shareholders are family members, funded by the founder via a gift or loan – can be a tax-efficient way of investing money. Income generated by the company will usually be subject to corporation tax of up to 25% and shareholders only pay tax personally when the company distributes income.

This is a complex area and can be costly to set up and manage (generally requiring an investment of £1m plus to be cost effective). Specialist wealth planning, legal and tax advice is required.

Tax-efficient ways to help your family

As well as saving for retirement, you might want to consider ways to reduce your tax liabilities while helping your family.

Junior ISAs

The junior ISA (JISA) allowance is currently £9,000 per year. This is a good way of introducing young people to the world of finance and helping them understand what can be achieved through disciplined saving and investing. A JISA automatically converts to an ISA when the family member turns 18, after which they can access it. 

Pensions for Children

The earlier you start building a nest egg for a child or grandchild, the more it can compound over time.

It is not linked to your earnings and you can contribute up to £3,600 per tax year. This figure includes basic rate tax relief at 20% (i.e. £720 – even though your child is a non-taxpayer). This results in a net cost of £2,880. Access is available once they reach the age of 55 (set to rise to 57 in April 2028).

Find out more about investing for children. 

Talk to us about tax-efficient retirement options for high earners

If you have a higher income, multiple or large pension pots or more complex requirements, retirement planning can be complicated – and there are many rules just waiting to trip you up. If you’d like to ensure you are making the most of pension allowances and consider alternative ways to save for your future, our wealth planning team is here to help.

At Canaccord Wealth, we offer retirement advice via our independent wealth planners. To find out more, please get in touch with us on +44 02 7523 4500 or book a free consultation.