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By Jess Franks, Head of Investment Products at Octopus Investments
Retirement, and planning for retirement, are important topics that require careful consideration and can benefit from expert guidance.
People are often faced with tax-related considerations during retirement when using their pension to help family members.
So, there can be a big opportunity for financial advisers to recommend tax-efficient investments to help clients achieve their retirement goals.
Drawing from a pension tax-efficiently
Most clients will have been saving into their pension for many years, so they can live a comfortable retirement, but find they have saved more than they need when they get there.
Kate is one of those clients.
After the birth of her grandchildren, she wants to help her daughter pay for their education.
Kate is aware of the tax rules on pensions – 75% of any amount she withdraws will be subject to income tax.
After assessing Kate’s goals and risk-appetite, her financial adviser recommends investing in a Venture Capital Trust (VCT) to help Kate extract from her pension tax-efficiently.
By investing some of the money she extracts from her pension into a VCT, Kate can claim up to 30% income tax relief on the amount invested, on up to a maximum investment of £200,000 in a tax year. She can use this to offset the income tax payable on her pension extraction.
Kate can also benefit from tax-free dividends, which could also be used to support for her grandchildren’s school fees alongside her pension extraction.
Crucially, Kate is able to use her pension and VCTs tax-efficiently to support her family, in line with her objectives.
Understanding the risks
Advisers must make sure any recommendation of these products is relevant and suitable for the client in question.
The client should understand that the value of an investment, and any income from it, can fall as well as rise. And investors might not get back the full amount they invest. Investments in a VCT are by their nature high risk, their share price may be volatile and they may be hard to sell when the time comes.
The tax treatment depends on the investor’s individual circumstances and associated tax rules could change in the future. Tax reliefs depend on the VCT maintaining its qualifying status.
See how tax planning can help your clients
To help you support good outcomes with tax-efficient investments, you can use our client planning scenarios. They’ll help you see how these investments can support a variety of clients across your entire client bank.
Explore planning scenarios from Octopus Investments >>
Tax-efficient investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation, or any other matters. Personal opinions may change and should not be seen as advice or recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No.03942880. Issued November 2023. CAM013455
