|Case Study Key Facts|
|Netwealth Risk Level||5|
|Contributions||£600 per month for 5 years|
|Income in Retirement||£4,000 (net) per month|
|Inflation Assumption||2% per annum|
|Timeframe||45 years (to age 95)|
|Pension Starting Value||
|GIA Starting Value||
|Annual ISA Funding from GIA||
The projection below shows a range of outcomes for Scenario A whereby the investor appropriately uses the various tax wrappers available and is also carefully drawing upon those tax wrappers in retirement to fund their income of £4,000 per month increasing in line with inflation.
The white dashed line shows the average projected outcome for Scenario A which is in the middle of the range of possible outcomes (the blue areas). As we can see in the average scenario, the portfolio is able to sustain the level of drawing required, beyond age 95.
Overlaid on the same projection, the red dashed line shows the average projected return for Scenario B. In Scenario B, the investor does not make any contributions to a pension or an ISA and instead solely contributes to their GIA. In this scenario the investor is projected to run out of money at age 90 in the average outcome.
Projected returns are illustrative and are not guaranteed.
In both cases, the gross investment return and sums invested are exactly the same, but simply by using tax wrappers appropriately the investor can benefit from at least five additional years of retirement income, which equates to £240,000 in today’s money, in this case.
In summary, although there are many factors to consider when investing that are out of your control, they should still be frequently assessed and taken into account so that action can be taken where necessary.
Making use of the appropriate tax wrappers (along with minimising fees, ensuring you stay invested and that you are well diversified) is very much within your control and can have a huge impact on your net returns over the long term. To focus on this is time well spent.
|Annual Allowance||Tax Advantages||Access|
|Pension||100% of salary up to a maximum of £40,000 (lower for those earning over £150,000 p.a.)||Money paid in net of income tax and investment returns are tax-free||From age 55, 25% tax-free and remainder taxed as income|
|ISA||£20,000||Investment returns are tax-free||Anytime tax-free|
|GIA||Unlimited||Capital Gains Tax Exemption of £11,700 per annum, Dividend Allowance of £2,000, and Savings (interest) Allowance of up to £1,000 p.a.||Anytime tax-free|
Please remember that when investing your capital is at risk.
1 If you are earning £120,000 per annum, this would be the cost. In other cases, the proportion of tax relief available would be less.
2 UK taxpayers can receive tax relief on pension contributions of up to 100% of their earnings or a £40,000 annual allowance, whichever is lower. Those with earnings over £150,000 have a reduced allowance.
3 FT article: “High earners caught out by clampdown on pensions tax relief” - 28 September 2018.
4 Non-taxpayers can still receive tax relief on pension contributions up to £3,600 (gross of tax relief).