Charles Stanley reveals mathematics of end-of-year tax planning

A mathematical analysis of end-of-year investment options by Charles Stanley shows how a combination of ISAs and pensions plans can provide investors with the most tax-efficient investment portfolios, with pensions offering the greater benefit for higher rate taxpayers.

The analysis of end-of-year tax planning options by Robert Corden, a member of Charles Stanley research, weighs the relative merits of investing via Self-Invested Pension Plans (SIPPs) and Individual Savings Accounts (ISAs). His key findings are:

higher rate taxpayers should accrue greater benefits from their net investment through a SIPP than through an ISA, thanks to the tax treatment of SIPP contributions. A net investment of £7,000 (the maximum currently permissible in an ISA) would be worth £11,667 in a higher rate taxpayer’s SIPP when all the tax is reclaimed;

in the last years of employment, particularly the last year, a higher rate taxpayer may wish to consider put as much money as possible into a pension plan up to the extent of his income taxed at higher rates (currently £31,150);

from a tax perspective, a person retiring should take the maximum cash sum from his or her pension even if he or she intends to purchase an annuity with all the cash. A “purchased life annuity” has a more favourable tax treatment then one purchased from a pension plan directly.

SIPPs also have the obvious benefit of higher annual investment limits: £215,000 in this tax year compared with £7,000 for an ISA. Also a greater range of investments can be included in a SIPP, such as commercial property and derivatives.

The analysis also considers the relative performance of equity indices, the effect of administration costs on SIPPs and ISAs, accounting for inflation, annuity values and the effects of other taxes (such as capital gains tax) on the amounts invested.

Robert Corden said: “There are no no-brainers when it comes to pensions and annuities. These are enormously complicated areas. However our mathematical analysis should at least give investors some idea of the questions they should be asking themselves – and their advisers.

“Perhaps the key message is that you should start young and save as much as possible, unless you have great expectations of an inheritance.”