Scotsman article: How to keep hold of an unexpectedly generous pension

07 March 2009

Dear Money Doctor,

I have recently (and rather cleverly, I think) managed to negotiate a pension of £703,000 a year from my former employer. Could you advise me as to how I can keep as much of it as possible?

Retired Banker, Edinburgh

Dear Retired Banker,

First, my congratulations. You must have been an exceptional banker to merit such an annual sum, which most people won't earn in their whole lifetime.

There are a number of ways that you can reduce the tax take. Have you considered becoming a tax exile? I am sure there are many tax havens where you will be made very welcome and should fit in nicely. Remember, if you remain tax resident in the UK, you will suffer 40 per cent income tax on most of your pension, with the rate set to increase to 45 per cent after the next election. I understand that Monaco is lovely at this time of year.

If you intend to remain resident in the UK and you're feeling charitable, gifts of amounts up to your taxable income can be made to Registered Charities under Gift Aid. As such gifts are grossed up by 20 per cent, a gift of, say, £500,000, would be worth £625,000 in the hands of the charities (in fact, until 2010-11 it will be worth £641,000 to the charities as they can claim an additional 2 per cent from HM Revenue & Customs). In addition, you would be able to claim back higher rate tax relief (20 per cent of £625,000) via your tax return. So a gift of £500,000 would have a net cost to you of only £375,000, while benefiting the charities by £641,000, with HMRC funding the difference. Such gifts might help to salve your conscience as well as depriving HMRC of significant amounts of revenue.

You don't mention whether you will have any other earned income (i.e. income from employment or self-employment). It may be that you will seek a wee job stacking shelves at Sainsbury's to occupy your time in retirement. Unfortunately, it won't be prudent to seek to gain income tax relief by paying any part of such income into further pension arrangements, as you are already in receipt of pension benefits above the Lifetime Allowance, meaning that surplus pension benefits will incur punitive tax charges amounting to 55 per cent.

If you have an appetite for risk (using your own money) you could consider investing in a Venture Capital Trust (VCT). If you buy a VCT at launch you receive a 30 per cent income tax rebate (if held for five years), tax-free distributions and dividends and no capital gains tax on any profit made on sale.

You should also use your full Isa allowance of £7,200 each year. You should also consider making significant gifts out of your income into trust for IHT mitigation purposes as well as making IHT-efficient investments such as certain Aim-listed shares and Enterprise Investment Schemes.

The Money Doctor
(aka Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee.)

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