Retirement Planning

Cash is ideal to satisfy shorter term objectives and needs for liquidity and accessibility. It offers a low risk, capital secure environment. Return is likely to be modest if interest equates to growth. Where income is required, the likelihood for a rising income to keep pace with inflation is minimal. Such holdings will be subject to Inheritance Tax (IHT).

These offer the investor personal enjoyment from the asset. Where the investor is an expert, returns may be more reliable. However, any realised gains are subject to Capital Gains Tax (CGT) and the returns are indeterminable. Indeed, there is the potential for the investment to be a wasting asset. Unlike pensions, subject to IHT.

Personal input into investment decisions equates to lower costs, although depending on expertise, could also equate to lower returns. Stockbroking advice adds to the costs. Gains utilise annual CGT allowance, which may or may not cover entire gains. Sensible planning reduces liabilities. Dividend income is also taxable. As portfolio increases, may become administratively cumbersome. Assessible for IHT.

Tailored & reduced risk over direct investments. Admin associated with large direct holding is greatly reduced. Also utilises CGT allowances but dividend income and excess gains are taxable. Costs are borne in the funds to cover investment management expertise. Are subject to IHT.

Can be utilised to hold either direct or collective investments, providing associated benefits or disadvantages. However, dividend income not taxable in the hands of the investor and gains regardless of level are not subject to CGT. Maximum of £7,200 per annum (£7,000 previously), upto £3,600 into cash, balance into stocks & shares or wholly into stocks & shares. Despite the tax benefits noted, this does not include exemption to IHT.

Essentially investment trusts investing into small unquoted shares or shares listed on the AIM market. High risk associated with investing in such small companies is offset by the favourable tax treatment, i.e. 30% income tax relief against incurred liability, and tax free dividend income and gains. Maximum investment £200,000 per annum. Do not qualify for IHT Business Property Relief (BPR).

An EIS is a scheme whereby certain tax benefits are granted for subscribing into qualifying shares in qualifying companies. Maximum investment of £500,000 per annum that qualifies for Income Tax relief at 20%, subject of course to a liability existing. Investment must be held for 3 years, otherwise this relief will be reclaimed. A key attraction of EISs is the ability to defer a CGT liability within one year before the gain is crystallised or within 3 years after. Gains made within the EIS investment itself are free from CGT. Furthermore, investment into an EIS qualifies for IHT BPR. These are attractive for investors due to the potential 60% tax relief (20% Income Tax and possible 40% CGT) available. Due to the high risk nature of these schemes, as investment generally in unquoted shares, diversification strongly recommended.

Life fund taxation reduces return and crystallised gains are subject to Income Tax although tax on fund absolves an investor of a basic rate liability. 5% per annum is treated as a withdrawal of capital and therefore not immediately taxable. If not used, 5% is cumulative which greatly adds to the benefit of bond investments. Written under appropriate trusts can lead to investment being effective in regards to IHT planning.

Fund rolls up almost without deduction of tax, however, tax is deferred until gains are realised. 5% withdrawal facility applies adding to the flexibility of investment. Collective investments may be held within bond wrapper and avoid CGT upon switching. Can be highly suitable for the more discerning investor. As with their onshore counterparts, can often be written in trust for IHT purposes.

Residential investment property or commercial property has been a popular investment due to capital appreciation and prospect of healthy and rising income. However, due care should be taken in that utilising recent returns as a gauge for future returns. Property can depreciate in value. Direct investment is illiquid

Retained company profits may be highly suitable for some investors. It avoids incurring a higher rate Income Tax liability on unnecessarily drawn dividends. Costs are borne in maintaining a company although in retirement, when the company may no longer be trading, these will be lower than an actively trading company. Whilst shares in limited companies may normally attract IHT BPR, excessive capital holdings are highly unlikely to do so.