Time to consider alternative savings choices.
FOLLOWING the recent news about the Government's restrictions on pension tax relief for higher earners, many higher rate taxpayers will now be looking for alternative ways to save.
The Government has slashed the amount of money that high earners can put into a pension by 80%, from pounds 255,000 to just pounds 50,000. This will come into force in April 2011, but there are still many savings choices available.
One is to maximise your ISA. Anyone aged over 18 is able to pay up to pounds 10,200 into an ISA (pounds 5,100 into a cash ISA and pounds 5,100 into an equity ISA). A married couple can save up to pounds 20,400. Any growth from an ISA is tax-free.
However, it is important to seek advice from an Independent Financial Adviser (IFA), as there are many different ISAs to choose from, with varied risk ratings.
You should also ask your IFA about Maximum Investment Plans (MIPs), which were popular in the 80s and are now coming back into fashion.
An MIP is a tax-efficient savings plan which requires regular payments for at least 10 years. Its performance is related to funds of your choice, and it provides a lump sum at the end of the term, free of any personal tax liability.
You can choose to extend the contract beyond the 10 years and take a flexible, regular, tax-free income while still investing contributions. . MIPs are not as heavily charged as they used to be and there is no limit on how much you can put in, as long as regular payments are made, and no contribution made can be more than twice that of any other. Those of you who receive annual bonuses can also pay annually.
Offshore Bonds provide a useful method of saving, because they allow your investments to grow offshore without taxes being deducted.
These bonds are provided by most of the Isle of Man, Dublin or Luxembourg-based subsidiaries of the major UK insurers.
The main benefit is that up to 5% of the original capital investment can be withdrawn from the bond each year tax-free. Offshore Bonds can be very useful for people who will be in a lower tax band at retirement.
However, it is important to remember with bonds such as these that the value of your investment can go down as well as up, so again, seek the help of an IFA. The Government-run Enterprise Investment Scheme (EIS) is also beneficial, as it offers 20% income tax relief to investors who subscribe to shares in qualifying companies.
The minimum subscription is pounds 500 per company and the maximum per investor is pounds 500,000 per annum. The main advantage is that there is no capital gains tax to pay, and any capital losses can be offset against other gains.
However, the EIS can be risky. The scheme best suits sophisticated investors who are accustomed to the risks of this type of investment, but they should still meet with an IFA before making any decisions.
Anyone can invest up to pounds 200,000 into a Venture Capital Trust (VCT) which attracts tax relief at 30%. Dividends and capital gains from a VCT are not subject to tax, if a trust is held for at least five years.
The main risk associated with VCTs is that investments are made in smaller, unquoted companies in the Alternative Investment Market (AIM), and investors sometimes have difficulty when they come to sell. VCT investors must therefore be aware of the slightly greater investment risk and lower liquidity in return for this attractive tax relief.
Although the Government cuts will undoubtedly be tough for many higher rate taxpayers, there are several alternatives.
Make sure you meet with an IFA to ensure that you take the right savings route for your circumstances.
For further information on how Alok can advise you on your financial planning, contact Dhanda Financial on 0191 255 8960, email: email@example.com or visit the website www.dhandafinancial.com
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|Publication:||The Journal (Newcastle, England)|
|Date:||Nov 6, 2010|
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