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DECUMULATION
The new pension freedoms that came
in from April 2015 give people much
more flexibility when it comes to taking
their pension at retirement, and for
many VCTs could play a role in planning
for a retirement without purchasing
an annuity, and to ensure tax-efficient
decumulation.
SATELLITE PORTFOLIO
The simplest strategy to consider is
to have a satellite portfolio of VCTs
alongside the pension - in the previous
section this is what we were implying
could be an option for clients who are
at, or near to, maxing out their pension
limits. With upfront tax relief, tax-free
gains and tax-free income, VCTs have
some similar features to pensions when
it comes to tax-efficiency. Of course
they do not have the same flexibility
of investment as pensions and will
generally be invested in much higher
risk underlying assets, but as a rule
of thumb investors who are near to
maxing out their pension are more likely
to have the requisite capacity for loss,
sophistication and attitude to risk (of
course this is not a given though and
must be ascertained and evidenced by
the adviser).
A small satellite portfolio like this can
grow alongside a pension, or provide
a tax-free yield to supplement pension
income.
TAX-EFFICIENT STRATEGIES
FOR DECUMULATION
VCTs can also be used in a more
sophisticated way to provide tax-
efficient decumulation. We’ve included
some ideas on how this could be done
below and on the following page.
“With a sizeable net asset base and the right balance between generating capital growth from the underlying
investments, while successfully building a steady and increasing income stream from dividends: then you
can potentially have an interesting proposition”
Chris Hutchinson, Unicorn Asset Management
#1 CRYSTALLISING £100K
In the example below, the upfront Income Tax relief from the VCT investment is used to offset the tax payable on the funds that
have been crystallised (over and above the £25,000 tax-free lump sum).
This means that the net cost of withdrawing £100,000 from the pension pot is £9,000 instead of £30,000. Of course, this also means
that £70,000 of that £100,000 has to be invested for a minimum of five years. The example assumes the client is a higher rate
taxpayer is suitable for VCT investments and can afford to go without the income the £100,000 that is withdrawn from the pension
pot could provide.
£500
k
PENSION
POT
£100
k
CRYSTALLISE
£70
k
INTO
VCT
£21
k
TAX
RELIEF
£91
k
WITHDRAW
£100K AT A NET
COST OF 9%
£25
k
TAX-FREE
£75
k
TAXED
£45
k