If you want to achieve the retirement you've dreamed of, it's vital you make the most of all the financial tools at your disposal.
When it comes down to it, retirement planning is essentially about one thing – ensuring you can fund your desired lifestyle once you exit the wealth creation phase of your life. While that may sound obvious, getting it right can be challenging.
In order to maintain your standard of living throughout a retirement that could span several decades, a high level of annual income might be required. Most will also want their wealth to transcend generations, so it provides support for loved ones. Add to the mix relatively modest caps on retirement vehicles such as pensions, and adequately planning for retirement becomes increasingly complex.
So, how can you ensure you have sufficient funds to sustain your retirement ambitions?
It has long been recognised that the sooner you start planning for your retirement, the more likely you are to achieve your goals. What hasn’t received quite as much emphasis is the value of alternative options and building a plan accordingly.
To do this, individuals need to first work out exactly what they want their retirement to look like. “Our first conversation with a client is about how much they’ll need each year in retirement and how large their retirement ‘pot’ needs to be to achieve that,” explains Nick Ritchie, senior director, Wealth Planning at RBC Wealth Management in the British Isles. “And then we’ll look at how we get them there and what structures we’ll use.”
Kevin O’Shea, director, Wealth Planning at RBC Wealth Management in the British Isles, stresses that this structuring is key. “Some clients might focus almost entirely on returns and hugely underestimate the impact of how the investments are structured and the effects of tax. Establishing these structures in an efficient way can make a significant difference to how far their money goes.”
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Pensions and individual savings accounts (ISAs) are typically seen as cornerstones of retirement planning because of their tax-related benefits. Broadly speaking, investments in both grow free from income tax and capital gains tax (CGT); while pensions benefit from tax relief on contributions and permit restricted tax-free lump sum withdrawals, all investments held in ISAs benefit from tax-free withdrawals.
“Factors such as this play a critical role in retirement planning,” says Ritchie. “As much as ensuring enough money goes in, serious consideration needs to be given to how it’s going to be taken out post-retirement and how to do so in the most tax-efficient manner.”
However, pensions and ISAs come with limitations – the latter has an annual allowance of £20,000, restricting the amount that can be invested tax-free.
For pensions, the maximum tax-efficient amount that can be added is between £10,000 and £60,000 each year, with the possibility of making a one-off contribution of up to £200,000 (if utilising unused allowances from the current and three previous tax years). From 6 April 2025, this will be £220,000.
The annual contribution amount is reduced by £1 for every £2 over the adjusted income threshold of £260,000. Therefore, if you had an adjusted income of £360,000 or more, you would have an annual tax-free allowance of just £10,000 (minimum allowance reduction).
Despite these limits, it’s typically recommended to max out your contributions in order to make the most of the tax-related benefits – before introducing alternatives to build a holistic retirement plan.
Two of the most effective alternatives are international bonds and venture capital trusts (VCTs).
Investing in international bonds can be a great way to complement other retirement structures, owing to their flexibility and potential tax advantages.
International bonds are similar to ISAs and pensions in that they act as a holding structure in which you can place a range of investments based on your return objective and attitude to risk.
Not only is there no upper limit on the amount you can invest, but tax typically isn’t paid on investment growth while funds are retained within the wrapper.
Retirement provisions can be met through the tax-efficient withdrawal of initial capital. This can be done by extracting a maximum of five percent of the initial investments per annum until the funds are depleted, with no immediate tax liabilities. This is also cumulative; so, if you take nothing in year one, you could withdraw 10 percent in year two.
It’s important to note that tax may be payable when the economic gain (i.e. value above the initial capital) is extracted. This gain is taxed at income tax rates but may be reduced by various tax reliefs (such as top slicing relief, where you spread the gain over the number of years the bond has been held, and time apportionment relief).
Excess wealth held in international bonds can also be gifted relatively tax efficiently, with the recipient inheriting the tax liability (which may give opportunity for a lower effective rate). Gifts would be subject to inheritance tax (IHT) rules and must be survived by seven years to be free of IHT. This form of planning would require work with a tax adviser to help reach an appropriate outcome for your circumstances.
VCTs were introduced by the UK government to encourage investors to support smaller businesses and startups. To attract those investors, VCTs come with several compelling tax incentives which can help play a significant role in retirement planning.
As well as offering upfront income tax relief of 30 percent, any profits made from the sale of VCTs are free from capital gains tax. O’Shea also points out that when it comes to retirement income, dividends are tax-free, “which can provide a tax-efficient, additional income stream.”
Notably, the annual cap for VCTs is £200,000, with no reduction for higher earners. “This is 10 times what you can put in an ISA,” says O’Shea. “And that can really move the needle for clients when they allocate capital over multiple years.”
While certainly a compelling proposition, it’s important to state that VCTs are higher-risk investments and have lower liquidity. As such, they would have to fit your appetite for risk and complement your other holdings so that your risk exposure is managed.
With so much to consider when it comes to retirement planning, it’s no wonder the recommendation is to start thinking about your strategy sooner rather than later.
For couples, there are additional considerations. If both individuals are retiring, structuring assets between them can ensure both sets of personal allowances are utilised, which can create significant tax savings over the years. For instance, married couples benefit from being able to make transfers of assets to each other with no immediate CGT.
“When you’re planning for retirement, you don’t want to end up with excess wealth so there’s a huge inheritance tax bill after your death,” says Ritchie. “You really need to factor this into your structuring at the outset.”
There are also gifting advantages built into international bonds. If not required for your own retirement, gifting segments of the bond can be an effective wealth-transfer strategy, as they can be assigned to children and surrendered at their own tax rates, which will likely be lower.
By having a diverse range of structures in which you hold investments – including having cash reserves in place – you can reduce your risk exposure and build a tax efficient retirement pot. But what should you consider when you want to start using this money?
“Generally, you will want to start funding retirement expenditure from cash rather than investments,” says Ritchie. “Because if you happen to draw on those investments in a declining market, it’s far harder to recover any crystallised losses.”
“At least annually, you should sit down and look at your expenditure requirements for the year ahead, how you are drawing it at the moment and whether you are doing that in the most efficient way,” says Ritchie. “And then make any necessary adjustments, so that your plans remain optimised.”
With all of the above in mind, it’s important to not only start planning for your retirement at the earliest opportunity, but to review your plans on a regular basis in case your circumstances, retirement goals or, indeed, regulations or broader global economic factors change.
Please note: This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should always check the tax implications with an accountant or tax specialist.
EIS investments and VCTs are considered high risk investments by the UK’s financial regulator, the Financial Conduct Authority. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a suitable timeframe for investment. Tax reliefs are subject to a minimum investment period and cannot be guaranteed. They depend on the individual circumstances of each client. Tax rules are subject to change. Past performance is not a guide to future performance, the value of investments and income arising can fluctuate significantly, future returns are not guaranteed, and you could lose all of the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.
This article was updated in Feb. 2025.
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