Robert Collins is hoping to use rental income from his £750,000 property complex to yield a sufficient income for his pension when he retires in three to five years’ time.
Collins, 66, runs his own business, which generates between £150,000 and £200,000 a year, although this fluctuates. Dividends from the company are taken to fund his investments and the living costs for him and his wife, aged 69.
The couple spend about £65,000 each year and regularly invest £14,000. The income from Collins’ business is supplemented by his wife’s £8,500 disability pension and the £23,000 rental yield from their property portfolio.
The couple have two grown- up children and Collins says he would like to split his legacy equally between the two, but is anxious to help one of his children purchase a home abroad now. As well as maximising the inheritance his children receive, he would also like to help fund the education of his grandchild.
He has £320,000 held jointly in Peps and Isas as well as £13,000 held in his wife’s name in a cash Isa. His investments are cautiously invested, he says.
Collins has £100,000 retained in his company, and is continuously adding to this figure in the anticipation of withdrawing it at minimal tax (10 per cent) on retirement. The majority of Collins’ investments are in property. As well as his £1m home, he owns a £240,000 holiday home, a £230,000 flat, which his wife’s carer lives in free, and a property complex worth £750,000.
He is, he says, deeply averse to pension and insurance plans and so intends to use his property to generate a retirement income.
Collins estimates he and his wife will require a retirement income of £50,000 a year on top of his wife’s pension. His wife’s disability means she requires one carer now and could well need more in the future. The couple have a small private pension worth £2,000 and have not yet taken up their state pension allowances.
John Lang, director at Tower Hill Associates, says pensions should be seen as an efficient tax wrapper and investment vehicle with a very wide investment choice, excluding residential property, and that if used properly are an excellent way of quickly building up capital from which to draw income in retirement.
“The downside, and it is a downside, is that the monies built up have to be used to provide a pension at some stage, apart from 25 per cent of the fund that can be taken out tax free,” says Lang.
Following the Arctic case, in which the House of Lords did not allow the Treasury to tax a wife’s dividends from a joint company at her husband’s higher tax rate, Lang says, the government is going to bring forward legislation to stop husband and wife companies minimising tax. He recommends the couple consider making sizeable pensions contributions over the next three to five years to build up their income-producing capital tax efficiently.
“I also recommend obtaining written tax advice that a 10 per cent tax charge on money extracted from a company on retirement is likely,” he says. “The accumulation of cash may be construed as an investment activity and therefore taxed at a higher rate.”
As Collins and his wife move into retirement, Lang thinks it likely that they will need to have significantly more readily accessible capital than the little over £400,000 they have now. He recommends they consider selling the small property complex by the time they retire to facilitate this.
Stephen Caps, certified financial planner at Ramsay Brown, says the couple will have a taxable estate of more than £2.4m on death. He advises Collins to make gifts of capital and surplus income to their children now.
“Any gifts out of capital will be considered potentially exempt transfers,” Caps says, “which will mean you will need to survive the gift by seven years before it falls out of charge to inheritance tax. However any gifts out of surplus income will be immediately exempt from inheritance tax.”
To qualify as a gift from surplus income, the money must not be required to meet their normal standard of living and be made on a regular basis.
“One way of achieving this would be to take greater dividends from the company while still working and gifting this surplus income to the children now,” Caps says.
John Porteous, certified financial planner at BDO Stoy Hayward Investment Management, says the couple could also include a codicil to the will to ensure that any gifts are taken into account when the estate is finally distributed, to ensure that both children are treated equally.
He also notes that to establish an exact idea of his state pension entitlement, Collins should fill out a BR19 form. “The couple should also each complete an Enduring Power of Attorney, so that their interests can be protected in the event of incapacity.” Name has been changed
