Pensions are still the most tax-efficient method of saving for retirement - with tax relief of 20% for basic-rate taxpayers, 40% for higher-rate taxpayers and 45% for additional-rate taxpayers. However, their restrictions could see experienced investors in particular searching for ways to save more for later life.
As of 2020/21, the annual pension allowance is £40,000, but the pension taper - introduced in 2016 - means anyone with a threshold income of over £200,000 and an adjusted income of over £240,000 per year will see this reduced.
On the other hand, an ISA is tax-free for everyone, regardless of your tax-rate, making them an important consideration for investors looking to supplement their pension.
And unlike decreasing pension allowances, the annual ISA allowance has been consistently on the rise - increasing from £15,240 to £20,000 in 2017/18, where it’s stood ever since.
In particular, the property-backed Innovative Finance ISA (IFISA) could be a valuable addition to an experienced investors retirement plan.
Important note: all information within this article is for educational purposes only, and is not personal advice. Speak to an independent financial advisor before making any investment or pension-related decisions.
Control, choice and flexibility
The high potential returns offered by a property-backed IFISA such as the CARLTON Bonds IFISA targeting between 4.75% and 7.75% - are an obvious attraction for experienced investors, particularly against the current backdrop of rock-bottom interest rates on the Cash ISA and the increased volatility of the Stocks and Shares ISA.
But the control, choice and flexibility afforded by the alternative investment is also a key benefit.
In general, the diverse range of IFISAs (from property and green energy, to consumer and SME loans) mean that - unlike with many pensions - you are able to decide where your funds go.
If you’re interested in earning a potential passive income from the ever-popular asset of property - without the hands-on nature, or expense, of buy-to-let - you could choose a property-backed IFISA, supporting regional house builders in delivering much-needed housing and boosting the UK’s economy, while supplementing your retirement fund.
When it comes to transparency, you will usually be able to track the progress of your property-backed IFISA on an easy-to-use platform, while your provider may (and should) give you regular updates on the projects your investment is helping to support.
The self-employed among us - of which there are over 4.5 million in the UK - don’t have the advantage of an auto-enrolment workplace pension scheme. This is a scheme whereby the employee must contribute 5% of earnings, while the employer is required to contribute 3%.
However, there are alternatives to the workplace pension, including private pension schemes, savings and investments, and the state pension - which is available to anyone who has made enough National Insurance contributions throughout their working life.
The property-backed IFISA could be a welcome addition to these, helping you to save more for later life in a tax-efficient manner.
A steady stream of income
Whether you’re wanting to obtain a lump sum upon maturity, or receive regular payments throughout the life of your investment, the property-backed IFISA gives you the choice.
The CARLTON Bonds IFISA boasts the ability to pay interest quarterly - as well as rolled-up and paid at the end of your agreed fixed-term - directly into your bank account on set dates. This could provide a potential steady stream of income for those in retirement.
If you invested some (or all) of your annual ISA allowance into an IFISA with the view of keeping it there until you’re ready for retirement, you could re-invest the proceeds each year to create a compounding effect. Once you’ve retired, you can start to withdraw some of the proceeds as income.
However, many IFISA providers - including CARLTON Bonds - allow investors to withdraw funds as soon as interest payments are made available in line with the term.
The age that you can typically start withdrawing money from a private pension is 55, while the current state pension age is 65 for both men and women.
In contrast, you’re able to withdraw funds from a property-backed IFISA at any age - subject to certain rules, which should be checked on a provider-to-provider basis - which could be a particular benefit for those looking to retire early.
However, it’s important to note that most IFISAs are fixed-term, requiring investors to lock away their funds for a set period of time - for example, with the CARLTON Bonds IFISA, you can choose between a two year fixed-term and a four year fixed-term.
This is unlikely to be a concern for those who aren’t close to wanting to redeem their retirement fund, but investors nearing retirement must be certain that they won’t need to access their money before the end of the investment term.
Supplementing your retirement fund with a property-backed IFISA
There’s no doubt that a pension could be beneficial to most when financially planning for retirement. But for those looking for additional, tax-efficient methods of preparing for later life, the property-backed IFISA could play a crucial role.
Benefiting from the ISA tax wrapper - that makes the account completely tax-free, forever - a £20,000 annual allowance, increased control and transparency, and a potential steady stream of income, the property-backed IFISA could be an important addition to a balanced and diversified portfolio.
The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).