‘How I make 6 per cent returns a year – and pay as little tax as possible’
Anthony Roberts faces the same problem as many retirees: boosting his income, while minimising his tax bill.
He worked hard as an NHS consultant throughout his life and now wants to make sure his investments and pensions are not eaten away by the Government.
“I’ve always had Isas, self-invested pensions (Sipps) and venture capital trusts,” he says. “I try to use all three to make sure that I am not paying any tax unnecessarily and to make my retirement as comfortable as I can.”
Roberts, 69, from Derby, uses a stocks and shares Isa to grow his wealth without paying taxes on returns, which he estimates at about 6pc a year.
Roberts holds five investment trusts in his Isa with AJ Bell, which form a key part of his portfolio. Several of these are the so-called “dividend heroes”, listed funds that have raised their dividend every year for at least 20 years in a row.
“Dividends are very important and the investment trusts in the UK pay very good dividends,” Roberts says.
Among his top holdings are the City of London investment trust, which has raised dividends for 56 years in a row, JP Morgan Claverhouse, which has raised its dividend every year since 1973, and the Merchants Trust, which yields around 5pc.
To maintain a diversified portfolio, he includes some investments that are known for capital growth rather than dividends, like Scottish Mortgage investment trust.
From next month, when dividend and capital allowances are halved, Isas will become even more important to savers like Roberts. He has a defined benefit pension from the NHS, where it is harder to limit the tax paid, but even here, says Roberts, he has a strategy.
He had stopped contributing to private pensions because he was over the lifetime allowance. However, now that Jeremy Hunt scrapped the lifetime limit he is reconsidering whether to put more money into his pension.
His Sipp is in “drawdown”, meaning that he is leaving his money invested and taking a regular income direct from the fund. He takes care when withdrawing money from his Sipp to make sure that he does not accidentally move himself into a higher tax bracket.
A large amount of his savings are in his private pension because he would be able to pass it on to his children without them having to pay inheritance tax.
He thinks of his Isas as a rainy day fund that he can withdraw cash from if he has an unexpected expense and, because Isa withdrawals are tax free, he can use this money to avoid overpaying tax on his pension income.
He also puts extra funds into venture capital trusts, which he says are generating returns of about 5pc to 7pc a year. VCTs, which invest in fledgling British businesses, pay out some of their returns to investors through dividends, which are free of tax, and also come with 30pc income tax relief if held for five years. Capital gains from VCTs are also tax free and there is a £200,000 annual investment limit.
Alex Davies, of Wealth Club, a specialist financial adviser, says VCTs are most popular with higher earners and wealthier investors, because the minimum investment is often £3,000 or more.
He says they are especially beneficial to those who already use the full £20,000 Isa allowance or whose annual pension contributions are tapered due to the amount they earn.
Davies says the £200,000 a year annual VCT allowance can save higher earners up to £60,000 in upfront income tax.
Roberts likes the Albion VCTs for their track record of preserving capital values. For income, he has invested in Octopus Titan, Octopus Eclipse and British Smaller Companies. “I just try to mix and match,” he says. Octopus Titan and British Smaller Companies are among Wealth Club’s top three picks, along with Baronsmead.
VCTs should not be considered as a replacement for a pension because of the much higher risks involved, but can help top-up savings. Mr Davies recommends spreading investments over multiple managers to cut risk.
In the past decade, the 10 largest VCTs have delivered returns of 83pc, according to Wealth Club.
“VCTs are more than just a tax planning tool,” says Davies. “They are probably the best way for UK investors to access fast growing smaller companies.”