There is trouble ahead for those with big pension pots. Well, relatively speaking, anyway. From April, the amount that most people can accumulate tax free in a pension falls from £1.5m to £1.25m. Anything above that will be hit with a punitive tax of 55%.
There are ways to avoid the problem – I’ve written about this before – but as Alistair Hardie of Standard Life told Kyle Caldwell in The Daily Telegraph: “the stark reality is, that reduction in lifetime allowance is going to hit more people that previously realised”.
HM Revenue & Customs expects around 360,000 people to end up caught in their new web, but the figure could end up being a lot higher. The limit is unlikely to rise with investment returns or inflation: it’s more likely to fall in real (inflation-adjusted) terms. So “someone in their 40s with a £300,000 pot could easily hit the limit by retirement”, says Caldwell.
So what do you do? We have long suggested that you don’t go overboard with pension savings. Fill up your individual savings account (Isa) and, if you can bear the risk, your children’s Junior Isas (remember they get control at 18) and then make sure you have a reasonable amount in your pension as back up. Then, to avoid hitting the new limit or ending up paying any other new pension-related taxes (I still wouldn’t be surprised by a one-off 1%-2% tax on everything in pensions, for example), you need to diversify.
That could mean looking at venture capital trusts (VCTs), funds that invest in very small companies.These offer pretty good-sounding tax breaks. You can put in up to £200,000 a year and get income-tax relief on the investment of 30% – as long as you hold for five years, and as long as you invest in new issues (so you don’t get these tax breaks when you buy the VCT second-hand on the stock exchange). So invest £100,000 and you can subtract £30,000 from the sum liable for income tax in your self-assessment tax return.
I’ve never been mad for these: I don’t like the idea of committing myself to anything for five years and I would prefer my investments to be investment- rather than tax-led. What’s the point in saving £10,000 in tax, only to lose £20,000 on a bad investment?
However, these days taxes are higher than they were (so all investment decisions end up warped by them), and five years doesn’t seem as long as it did. So VCTs are beginning to look more attractive than they did – assuming your Isa is full, your pension full enough and you keep them as a relatively small part of your portfolio.
Caldwell points to the British Smaller Companies Trust as being the best performer since 2003, and the Hargreave Hale Aim VCTs as being “tipped by a number of brokers”. Otherwise you might look at the offerings from Amati Global Investors.
However, whatever you do, bear in mind that fund managers will take advantage of you wherever they can. In the case of VCTs, this often means very high fees, fees that the tax breaks and potential performance may or may not compensate for.