Pensions & Tax Efficient Investment Advice

Pension and tax-efficient investment planning is an essential strategy for maximising your wealth while reducing your overall tax liability. By making smart use of pensions, you can benefit from valuable tax reliefs on contributions, tax-free growth and structured access to your funds in retirement. Alongside pensions, a range of tax-efficient investments – such as ISAs, Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) – can provide opportunities for growth while offering generous tax advantages. But as always, a well-considered and strategic approach is essential. 

Pension contribution limits and tax reliefs (2025/26)

There are the following reliefs and allowances: 

• Annual Allowance (AA): £60,000, or up to100% of your earnings if lower
• Tapered AA: Threshold income > £200,000, Adjusted income > £260,000 – AA reduces to £10,000 minimum
• Lump Sum and Death Benefit Allowance: £1,073,100
• Carry forward rules allow unused AA from the last three years
• Defined benefit pensions: Employer contributions typically capped between £150,000 and £180,000, depending on actuarial valuations

Tax planning tips:

• Maximise use of the £60,000 Annual Allowance and carry forward unused allowance from prior years
• Monitor your income to avoid the tapered allowance (starts above £260,000 adjusted income)
• Make pension contributions for non-earning spouses or children. Contribute £2,880 and HMRC will add 20% tax relief of £720

Taking benefits from your pension scheme

Individuals can start taking income from their pension fund from age 55 (rising to 57 from 6 April 2028). You can withdraw as much or as little as needed, though withdrawals above the 25% tax-free lump sum are taxed at your marginal income tax rate.

The 25% tax-free lump sum can be taken upfront or in instalments with each pension payment. The Lump Sum Allowance (LSA) is £268,275.

Once pension benefits are flexibly accessed, the Money Purchase Annual Allowance (MPAA) of £10,000 applies to future contributions.

Tax planning tips:

• Stagger pension withdrawals to avoid triggering higher tax rates
• Take only the tax-free portion if you plan to continue contributing above the MPAA limit (£10,000)

Death benefits and inheritance tax on pensions

If death occurs before age 75, most unused pension funds can be paid tax-free to beneficiaries. After age 75, beneficiaries are taxed at their marginal income tax rate.

From 6 April 2027, unused pension funds and death benefits will form part of the deceased’s estate for inheritance tax, subject to spouse exemptions.

Tax planning tips:

• Nominate beneficiaries clearly to ensure tax-efficient transfers
• Consider withdrawing before 6 April 2027 to avoid IHT on unused pension funds
• Use spousal exemption to defer IHT and allow flexibility

Pensions for non-taxpayers and family contributions

Non-earners can contribute up to £2,880/year into pensions and receive 20% tax relief, bringing the gross value to £3,600.

Parents and grandparents can make pension contributions for children and grandchildren, which can be exempt from inheritance tax if made from excess income or using the IHT annual exemption.

Tax planning tips:

• Make regular pension contributions on behalf of family members to grow tax-efficient wealth
• Structure contributions from excess income to qualify for inheritance tax exemption under “normal expenditure” rules

Individual Savings Accounts (ISAs)

ISAs are tax-efficient savings vehicles. For 2025/26:

• ISAs: £20,000
• Junior ISAs: £9,000
• Lifetime ISAs: £4,000 (excludes government bonus)
• Child Trust Funds: £9,000

ISA income and gains are tax-free. On death, spouses can inherit the ISA value allowance in addition to their own. Junior ISAs allow tax-free investment for children. Contributions belong to the child and can fund university or a first home.

Tax planning tips:

• Max out your ISA allowance annually to shelter investments from income tax and CGT
• Use the spouse ISA transfer allowance to preserve tax efficiency upon death

Lifetime ISAs

Available for those aged 18–40. You can save up to £4,000/year up to age 50, receive a 25% government bonus (Up to £1,000) per year, and withdraw tax-free to buy a first home up to a value of £450,000, when you reach age 60 or due to terminal illness. Early, or unauthorized, withdrawals incur a 25% charge so you may get back less than you paid in.  The £4,000 annual limit counts towards your annual ISA limit of £20,000.

Tax planning tips:

• Open early and contribute annually to benefit from the government bonus
• Use for first home or retirement; avoid early withdrawals to prevent the 25% penalty

Helping your family

Children and grandchildren have a £12,570 tax-free income threshold. Gifts into pensions or ISAs for minors can reduce your estate and grow their wealth.  Trust distributions to children may allow recovery of tax or use of lower rates.  

Junior ISAs allow parents, grandparents, and others to contribute up to £9,000/year. The child can take control of the account when they reach 16 but cannot withdraw funds until they reach 18.   

Tax planning tips:

• Fund Junior ISAs and pensions for children or grandchildren to remove assets from your estate and support future costs like education or home ownership
• Employ older children in a family business within reasonable limits to utilise their personal allowance

Tax-efficient Venture Capital Investments

The Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), Venture Capital Trusts (VCTs) and Community Investment Tax Relief (CITR) are government-backed initiatives designed to encourage investment in smaller, higher-risk companies by offering generous tax reliefs to investors.

VCTs offer generous tax incentives such as income tax relief, tax-free dividends, and exemption from capital gains tax on qualifying shares. CITR, on the other hand, rewards investors who provide funding to accredited Community Development Finance Institutions, which in turn support businesses and projects in disadvantaged communities, with a fixed rate of income tax relief over five years. 

All of these schemes can be high risk, illiquid and may not be easily realizable, but they can also be valuable components of a diversified, tax-efficient investment strategy.

Enterprise Investment Scheme (EIS):

• 30% income tax relief on up to £1 million/year (£2 million if at least £1million is invested into knowledge-intensive companies)
• CGT deferral and exemption after 3 years
• Loss relief available against income
• Carry back income tax relief to the prior year

Seed Enterprise Investment Scheme (SEIS):

• 50% income tax relief on up to £200,000/year
• 50% CGT exemption on other gains if gains reinvested in SEIS
• Exempt from CGT after 3 years
• Carry back income tax relief to the prior year

Venture Capital Trusts (VCTs):

• 30% income tax relief on up to £200,000/year
• Tax-free dividends
• No CGT on disposal after 5 years

Community Investment Tax Relief (CITR):

• 25% income tax relief over 5 years (5% per annum) for investments in community finance institutions

Tax planning tips:

• Use EIS or SEIS to gain generous tax reliefs and defer or eliminate CGT
• Consider carry-back relief to offset prior year income tax
• VCTs provide tax-free income—ideal for high-rate taxpayers seeking passive income

 As always, these articles provide an overview of the various measures available and no action should be taken without seeking professional advice.  At Ritchie Phillips, we pride ourselves on providing clear, pragmatic advice to help businesses, individuals and families. If you’d like to discuss any of the above, please get in touch.