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Best Low Risk Tax Efficient Investment – Ever! – Revisited

Shared from Tax Insider: Best Low Risk Tax Efficient Investment – Ever! – Revisited
By Tony Granger, June 2015
The new pensions’ freedoms coming in from 6 April 2015 has caused a rethink about using pensions as an investment. The stock market is currently in its ascendancy, but bank interest remains low and not very exciting. Investors want inflation-beating income. There is a defocus on annuities at present. What follows will therefore be seen as contrarian – whilst the herd moves one way, the sage investor moves in another direction.

Get a 20% return immediately from HMRC
Pensions are an interesting investment. It is one of the very few investments where the government adds 20% to whatever you invest, whether you are a taxpayer or not. So for every pension contribution you make, the state adds 20%. That’s a 20% return on your investment before it even starts earning you money! Better still, if you are a higher rated taxpayer (with taxable income of over £31,785 in 2015/16, then a further 20% of your investment comes back to you through the tax system.

So pensions can be great investments. If you are aged 55 or above, you can take tax free cash from a pension fund at 25% of the fund. The balance of the fund can give you an income for life. So, if you are a saver looking for really good returns, you can make a single premium pension contribution every year and immediately take your tax free cash and an income for life, so long as you are aged 55 or over now. You could have a return of around 25-30% per year (depending on your age) if you employ this strategy (note that after 6 April 2015, you can take more than 25% in cash paying tax at marginal rates on the excess).

 

Example 1 – Net cost and benefit of a pension contribution (1)

 

Joe earns £60,000 a year and is 55 years old. He can contribute up to 100% of relevant earnings, subject to a maximum of £40,000 in taxable earnings. He has no medical issues, and is a non-smoker.

 

Gross Contribution                                                          £20,000

HMRC uplift at 20%                                                         £  4,000

Net contribution by Joe                                                £16,000

 

Joe takes 25% tax free cash (25% x £20,000)        £5,000

Joe gets back a further 20% through tax return  £4,000 (as a higher rate taxpayer, a further 20% is reclaimable)

Total savings                                                                      £9,000

Total cost of investment £16,000 - £9,000 =          £7,000

 

Balance of fund for income annuity for life           £15,000 (at £56.25 per month at 4.5% rate)

If Joe was age 70 he would get £80 per month at 6.4%.

Plus he has £5,000 in tax-free cash to spend.

 

Example 2 - Net cost and benefit of a pension contribution (2)

 

Martha is age 70.  She is retired and needs to invest for income. She can contribute a maximum of £3,600 gross, £2,880 net to a personal pension plan, without earned income. She has no medical issues.

Gross Contribution                                                          £3,600

HMRC uplift at 20%                                                         £  720

Net contribution by Martha                                        £2,880

 

Martha takes 25% tax free cash (25% x £3,600)   £900

Total cost of investment £2,880-£900 =                  £1,980

 

Balance of fund for income annuity for life           £2,700 (at £14.40 per month (6.4% return))

Plus she has £900 in tax-free cash to spend or direct to income.


Variations

You have a number of choices – you do not need to take tax-free cash immediately – you can let your funds grow and then take tax-free cash. You can even take the tax-free cash and defer the income.


Medical issues, smokers, etc.

The annuity interest rates can increase from the 6.4% shown above to around 8% plus, improving income for life even further.


Practical Tip:

If aged over 55, consider the benefits of a personal pension plan as an investment. Your fund grows tax-free, HMRC adds 20% to every contribution you make, and 25% of the whole fund is immediately available to you as tax-free cash. You can take or defer income from the balance of the investment, which would be taxable (but tax free if within your personal allowance).


Please note that the pension rules are complex, and professional advice is strongly recommended. In addition, the above examples are for illustration purposes only. Investment advice should be obtained from a suitably qualified and experienced financial adviser, based on your own personal circumstances.

The new pensions’ freedoms coming in from 6 April 2015 has caused a rethink about using pensions as an investment. The stock market is currently in its ascendancy, but bank interest remains low and not very exciting. Investors want inflation-beating income. There is a defocus on annuities at present. What follows will therefore be seen as contrarian – whilst the herd moves one way, the sage investor moves in another direction.

Get a 20% return immediately from HMRC
Pensions are an interesting investment. It is one of the very few investments where the government adds 20% to whatever you invest, whether you are a taxpayer or not. So for every pension contribution you make, the state adds 20%. That’s a 20% return on your investment before it even starts earning you money! Better still, if you are a higher rated taxpayer (with taxable income of over £31,785 in 2015/16, then a further 20% of your investment comes back to you
... Shared from Tax Insider: Best Low Risk Tax Efficient Investment – Ever! – Revisited