Retirement & Pensions

The Probe - August 2005

We often get asked what's the best form of investment. Some of the options are Individual Savings Account (ISA), Pensions, Maximum Investment Plans (MIPs), Residential Investment Properties, Commercial Properties, Cash deposits in a bank or building society, Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EISs), Investment or Unit Trusts or Friendly Society Plans. And what's more confusing, this is only a handful of the options available!!

Most people consider capital growth, charges and tax relief on contributions, but another important factor is how the income from that investment is taxed when you want your money back out.

As regards paying tax on your income in this tax year (2005/6) you currently pay no tax on the first £4,895 of earnings, you then pay 10% tax on the next £2,090 and then 22% on the following £30,310. The balance of any taxable income is then taxed at 40%. There’s a high possibility that any tax regime in the future will reflect current practice although the actual figures will have gone up with inflation.

So, whilst you're working all your earned income over the first £4,895 is taxable. Once you’ve retired though you can be a little more flexible with your income as not all your income needs to be in the form of taxable income. However to be able to achieve this you’d need a good spread of the above investments.

Pensions are a great form of investment because you can get 22% - 40% tax relief on all the premiums, however the income on retirement is taxable.

The ideal situation would be to retire on no more than £37,295 per annum in the form of taxable income every year so you're avoiding paying higher rate tax of 40%. If you need any more income you’d be advised to take it from non-taxable sources such as the ISAs, MIPs, VCTs, EISs, and the tax-free cash element of your pension.

So on retirement if you think you'll earn say £25,000 from your NHS pension, State Pension and income from investment properties or part time surgeries you really only want to earn another £12,295 from your personal pension funds. So if your pension funds are likely to pay you more than that (in todays terms) you might want to consider some alternative investments that potentially won’t be taxable in the future.