VCT guide

46 CASE STUDIES 1 Tax efficient extraction from pension David has been retired for three years and is financially comfortable in retirement. Following the birth of his second grandchild and, with the new pension freedoms, David would like to use some of his pension to assist with the future education of his grandchildren. David is keen to plan well ahead and is investigating options to take money out of his pension in a tax-efficient manner. *Note, in the lower rate taxpayer example, the £5,100 income tax relief only applies if David has at least £5,100 of income tax to offset in total in the tax year. If not, based upon the tax due on the pension withdrawal, only £3,000 of it can be offset against income tax due. The remaining £2,100 will be lost. David would like to use his pension to assist with the education of his grandchildren ISA Following a discussion with his IFA and a suitable recommendation, David invests in a VCT. Dividend Gains Income tax relief on up to £200k p.a VCT invesment benefits: 47 CASE STUDIES £20,000 withdrawn from pension £6,000 tax due on pension: 25% tax-free, 75% at higher rate £20,000 withdrawn from pension HIGHER RATE TAXPAYER (40%) This illustration assumes that David has other income which means he pays the higher rate of tax LOWER RATE TAXPAYER (20%) This illustration assumes that David is basic rate tax payer £3,000 tax due on pension: 25% tax-free, 75% at basic rate save remaning cash in savings account £14,000 remaining after tax save remaning cash in savings account £17,000 remaining after tax £14,000 invested into a VCT £4,200 30% tax relief £18,200 remaining after tax (70% of initial tax has been offset) £17,000 invested into a VCT £5,100 30% tax relief £22,100 remaining after tax VCT VCT