When a £215,000 pensions annual allowance was introduced in 2006, you have been forgiven for thinking it was the kind of ceiling you’d never have to worry about bumping your head against. Unfortunately, in the intervening years, it has been lowered dramatically and in future it may get even lower still.
If it’s threatening your headroom, you need to get to grips with your retirement savings alternatives. Fortunately there are six solutions – including tax-efficient savings and investments, handy allowances, and planning strategies.
The trouble is that some of these are under threat in the Budget too. The dividend allowance is a really easy target for Philip Hammond. It was introduced at £5,000 in April 2016, cut to £2,000 in 2018, and there’s nothing him stopping him cutting it further or axing it altogether to make ends meet. It means that it’s worth investing what you can as tax efficiently as you can while you can.
Retirement savings alternatives once you reach your pension limits
- Use your LISA allowance.
If you’re aged between 18 and 39, you can save or invest up to £4,000 a year into an ISA, and the government will add a bonus of 25%. You can use the LISA to pay for a first home, or save for retirement. The way the bonus works means that for most employed people, saving for retirement through a pension is a better bet – especially if your employer is offering contributions. However, if you are about to breach the allowance, a LISA is a great alternative
- Make full use of your ISA allowance.
In the current year you can put up to £20,000 into an ISA, where growth and payments will be free of tax.
- Make use of your tax allowances
If you want to invest more than the ISA allowance, it’s worth thinking carefully about how you manage this. At the moment you have a dividend allowance of £2,000 a year, so you can move dividend-generating investments into your ISA in order to stay below this threshold. You also have a capital gains tax allowance (£11,700 this year), so you can manage your gains in order to stay under this threshold too.
- Use your spouse’s allowances
If they are working, they have a pensions annual allowance of up to £40,000, so you can top up their contributions. Even if they aren’t earning they have an annual limit of £3,600. You can make contributions into your spouse’s pension, ISA and LISA. You can also make full use of their capital gains tax allowance and dividend allowance by investing in a fund and shares account.
- Consider VCT and EIS
These have specific tax benefits: if you buy newly issued shares in venture capital trusts or enterprise investment schemes, and hold them for a minimum number of years, you get capital gains tax relief and tax relief to set against any income tax liability. However, these are very risky investments, so are only suitable for the minority of investors who are prepared to take this level of risk with their retirement savings.
- Talk to your employer
In some cases your employer will be prepared to redirect contributions into a workplace ISA once you have reached your pensions annual limit.
This may be especially fruitful once you earn over £150,000, and the annual allowance taper kicks in. The tax rules means you can’t use salary sacrifice to bring your income down. However, you can ask your employer if they are prepared to pay you in cash or contribute to a workplace ISA instead once you have filled your reduced pensions allowance.
About the Author / Gareth Hargreaves
Gareth looks after all editorial content on 50connect. He is the Swiss Army knife of content ideas and production.
