With the introduction of the tapered annual allowance and the reduced lifetime allowance (LTA), retirement planning is somewhat limited for higher earners or those with generous final salary benefits, or well-funded self-invested personal pensions (Sipps), with no further scope to fund their pensions.
In considering employee remuneration, employers have found themselves left with the difficult dilemma of how to provide additional benefits. In particular, whether to pay additional bonuses or dividends, or continue funding contributions into a pension. For those employees with pension pots in excess of £1m who are intending to apply for Individual Protection 2016 and have their employer continue to contribute, it may still be the most tax-efficient option when compared to other forms of remuneration.
However, where the tapered annual allowance is causing the problem, this might not be so simple. Any payment made in excess of the reduced annual allowance would result in a tax charge on the individual at their highest marginal rate, regardless of the fact that it is the employer who has made the contribution. So, essentially, there is no tax relief on the excess over the annual allowance.
Though many of those restricted by the LTA may have large pension funds, those restricted by the tapered annual allowance may not have had time to build up sufficient retirement provision. It might be the case that their fund has significantly reduced as the result of a pension-sharing order and again due to the annual allowance restrictions, and they will find it difficult to rebuild pension benefits in what may be a very limited time frame.
So what are the alternatives to pensions, when retirement planning is the main concern or objective?
Bonds
One option is the international bond, which can be a useful pension alternative for providing additional retirement funds while having many complementary features that sit well alongside a pension as part of a retirement strategy.
• Regular premiums can be made to a bond.
• There is the benefit of gross roll-up within the bond.
• A tax-efficient income can be taken (within the 5 per cent limit).
• The bond can be wrapped within a trust for inheritance tax (IHT) purposes.
• The bond does not suffer from any restrictions in terms of annual or lifetime limits.
Obviously, there are other alternative investments to pensions other than international bonds, and it may be the case that the client has a combination of non-pension assets, all of which can play a part in producing tax-efficient income in retirement. So it does not have to be an ‘either/or’ scenario, and different products can complement each other.
