Investment strategies to complement the lifetime allowance

GUIDE 6 OF 6

Having considered the Pension Lifetime Allowance as part of tax efficient planning, our final guide considers how your pension investment strategy can impact the LTA charge. 

As we have said throughout these guides, there is no silver bullet that magically removes the LTA tax charge. However, investment strategies can complement LTA pension planning, whilst still focusing on attractive returns.

Whilst the comments below outline various opportunities, a suitable investment strategy will depend on an individual’s situation, goals, risk appetite and their financial capacity to accept loss.

Funds within the lifetime allowance

Typically, funds within the LTA are used to meet or supplement a retirement income. We generally recommend a diversified portfolio of assets that aims to protect the capital from inflation and to cover regular withdrawals. The balance between investment growth and withdrawals can be managed to reduce the possibility of a second LTA charge at age 75.

funds in excess of the lifetime allowance

If the funds within the LTA generate sufficient income, then some or all of the funds in excess of the LTA could be used for other purposes e.g. inheritance and estate planning.

Any funds in excess of the LTA will face a minimum tax charge of 25% at either age 75, on death or if specifically accessed. Given this reality, if the funds are not required to meet income needs and a 25% charge is unavoidable, it can make sense to maximise the pension value in excess of the LTA.

EXAMPLE STRATEGY

  • Kate has an uncrystallised SIPP valued at £1.5m and has no LTA protection. She requires £40,000 a year from these investments.
  • Kate draws her maximum tax-free cash (£268,275) which is then re-invested into tax efficient wrappers. Together with the remaining funds within her LTA, these more than meet her annual needs.
  • For the funds in excess of the LTA Kate and Bentley Reid agree that, as she has no additional income requirements at this stage, they can be used for a different purpose. Bentley Reid, therefore, propose the following:
Holding£ InvestmentInvestment Mandate
Funds Within LTA (including tax-free cash)£1,073,100Bentley Reid £ Balanced
Funds in Excess of the LTA£426,900Bentley Reid Global Growth
Total£1,500,000
  • This is for illustrative purposes only and should not be considered a recommendation to take any particular action.
  • The funds within Kate’s LTA follow the Bentley Reid £ Balanced mandate. This fund is a multi-asset, globally diversified fund that targets long-term real returns. It is a conservative, liquid strategy and suits the regular withdrawals that meet Kate’s £40,000 pa requirement.  
  • The funds in excess of the LTA are invested into the Bentley Reid Global Growth mandate. As Kate has no immediate needs for these funds and they are not being used to meet her annual needs, they accept the inherent risk and volatility of a pure equity mandate, in pursuit of attractive long run returns.
  • Note the value of investments can go down and well as up and that the past is no guide to future performance.

Typically, funds within the LTA are used to meet or supplement a retirement income. We generally recommend a diversified portfolio of assets that aims to protect the capital from inflation and to cover regular withdrawals. The balance between investment growth and withdrawals can be managed to reduce the possibility of a second LTA charge at age 75.

As noted above, any suitable investment and drawdown strategy will depend on an individual’s situation and goals; the above example is for illustrative purposes.

To learn more about Bentley Reid’s investment approach and market analysis, please visit our Publications Page.

If you would like to explore a suitable investment strategy in regards to managing your pension and LTA, then please do contact a wealth manager at Bentley Reid to discuss your situation.

SPEAK TO AN Adviser

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