A large number of Gould Financial Planning clients have been successful in their chosen career, either reaching the pinnacle of their profession or building a business and accumulating significant wealth. Many have acquired a substantial pension fund during their lives and, at retirement, find they have more than sufficient wealth to meet their lifestyle costs for the rest of their lives … and beyond.

Quite simply, their pension funds have become surplus to requirements – and a large tax bill looms!

Take Huw, for example. Aged 74 and in good health, and with personal financial wealth exceeding £3 million and an annual income of £100,000 from investments and occupational pensions, Huw also has a private pension fund worth a further £1 million which he does not need and has remained untouched.

His concern was that this pension fund was going to be more beneficial to the Chancellor of the Exchequer than it could be to his three children – and came to us for help.

The scenarios facing Huw were:

• Although there would be no tax on the pension fund if he died before age 75, from age 75 the pension could suffer tax up to £450,000.

• Worse still. If he drew the pension income, he would pay 40% tax, plus then a further 40% Inheritance Tax on the residue if he did not spend the money. The government would get £640,000 in tax and the children just £120,000 each. At 45% income tax, the government swallows up even more and his children inherit even less.

• Even If he took his tax free cash before his 75th birthday and then drew down the income, the taxman would get £580,000 in tax and his children get £140,000 each.
Gould Financial Planning managing director Andrew Gait said: “Huw told me he wanted to reduce his tax bill; reassuring me he would never need the pension fund for himself and, if necessary, would give the money away to his children.
“We asked Huw how much tax he would be prepared to pay. Would he, for example, agree to paying £450,000 in tax – after all, he did enjoy tax relief on the contributions and paid virtually no tax within the fund? If so, we could either arrange for:

• His pension fund to be emptied as income over 10 years and then gift the net income to his children on an annual ‘out of income basis’, or

• His pension pot to be emptied in one go, and invest the proceeds back into a portfolio of UK smaller companies that would qualify for relief from Inheritance Tax after just two years

But that was still too much for Huw, who was prepared to take serious investment risk to reduce his tax bill.

This is the advice Gould Financial Planning gave to Huw, which he accepted and followed:

• Take the tax free cash and empty the pension fund over a three year period paying income tax in the process – An income tax bill, for the most part at 45%. Huw paid £112,500 per annum in income tax

• But for the most part this would be just a loan to HMRC! Later in the year Huw would get the income tax back by investing £333,000 a year for three years into a selection of Enterprise Investment Scheme projects – all rigorously vetted by Gould Financial Planning. EIS investment of this type attracts income tax relief at a rate of 30p in the pound so Huw would obtain a tax refund of £99,900 per year. EIS investments also attract relief from Inheritance Tax after two years, and capital gains can also be deferred.

Huw’s income tax bill has now been shrunk to £12,600 a year for three years, and two years after each of the investments had been made the inheritance tax bill enjoyed IHT relief.

The total tax take was reduced to £37,800 and Huw’s children will inherit £320,000 each

Postscript: The recommendations of EIS investments are dependent on the individual circumstances of each client and maybe subject to change in the future.

Enterprise Investment Schemes are very high-risk investments. An EIS investment is usually concentrated in one single unquoted trading company and therefore it is usual to diversify amongst a number of EIS investments. Often there is no market for the shares and it may therefore be very difficult to make a disposal. There is a strong possibility of one or more of the portfolio of companies selected failing.

‘The Financial Conduct Authority does not regulate tax advice for individuals.’