Case Study: Pension Planning – Exceeding the Lifetime Allowance

Sarah has been paying into her final salary pension since qualifying as a doctor some 20 years ago. Over the years she has built up a sizeable pension. But now that the LTA is set to be reduced to just £1 million, Sarah is worried that her pension will exceed that amount and she’ll face a tax charge of up to 55% on the excess. To make sure this doesn’t happen, Sarah would like to find alternative ways to invest for retirement, preferably ways that still offer her a tax-efficient income.

Sarah talks to us and we make an assessment based on her risk profile, her investment time horizon (of more than five years) and her attitude towards smaller company investing. Given this, we suggest investing in a Venture Capital Trust (VCT).

In the two decades since they were first introduced, VCTs have earned a place alongside personal pensions and Individual Savings Accounts (ISAs) because of their ability to offer a tax efficient investment and the potential to provide an income.

These characteristics are proving even more popular with individuals like Sarah, following changes to the pension rules. With a VCT, Sarah can claim up to 30% income tax relief on up to £200,000 invested in any single tax year, provided the VCT shares are held for at least five years. Sarah can also benefit from tax-free dividends, and any gains when she chooses to sell the shares will also be tax free.