Something to be aware of is that if you’re a high earner, there’s a chance that you may not have this level of contribution open to you. If you’re earning over £240,000 then your pension annual allowance is tapered down progressively to just £4,000 if your income goes over £312,000.
There is actually a more complex calculation to do to work this out as it’s all skewed by things like salary sacrifice and stuff, but we don’t need to worry about this here. Now I don’t imagine there are many people crying over folks earning over £300k not having much pension allowance, but it is a real issue, and is an example when higher levels of wealth create their own problems.
High earners often consider the charms of Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) worthy of attention. Both these schemes offer decent levels of tax relief – 30% currently, and decent contribution limits – £200k for a VCT and £1m for an EIS.
So, if you invest £200k in a VCT you get £60k of your tax back. There are also capital gains tax and potentially inheritance tax benefits of EISs, but there’s a sting in the tail.
The tax breaks are so good because the government is incentivising investment into small, early-stage companies. By definition that means that these are going to be risky investments with a high chance of at least partial failure.
Generally, your money would be spread over only a very few companies, and if one or two of those fail completely, then it could get messy for you. Of course, those companies might also boom and make you 20x your money back – but it’s a risk.
You might think that a high earner is more willing to take high risks on their investments, but that’s not my experience. Risk tolerance is a very personal thing, and nothing to do with how much you make or how much you have.
EISs and VCTs are likely to only be the preserve of very few people, but I will come back to them in a future post, because they may be useful even for mere mortals in certain circumstances.
A Word on Platforms
Before we look at what you need to do, let’s talk quickly about platforms, as these are also a source of confusion. I sometimes get emails from people telling me that their Hargreaves Lansdown ISA isn’t doing very well. I know what they mean, but this statement makes no sense.
Hargreaves Lansdown, Interactive Investor, YouInvest and Charles Stanley and a ton of others are platforms, and a platform is merely an admin system which allow you to hold different types of accounts in one place.
You can hold an ISA, a pension and a GIA all on one platform. Within those accounts or wrappers, you hold the underlying investments, the funds or whatever. Which platform you use, then is largely a matter of just a few things:
Taste – which UI (User Interface) do you like better? Do you find one confusing and another one intuitive to use? Then use the intuitive one.
Charges – some platforms charge dealing fees, some don’t. Some charge a percentage-based fee, others a flat fee. Which one is best for you depends on your circumstances and what you plan to hold on there. If you have a small amount invested you may be better off with a percentage charging platform, until you get to a higher amount invested.
Available investment options – Some platforms are pretty much open-architecture; you can buy any traded asset on there. Others are much more limited, perhaps only offering access to funds, not shares or ETFs. Others are still more limited, only offering funds from one provider, like the Vanguard Investor platform for example.
Let’s not lose sight of the fact that the biggest factor in your future financial success is going to be your choice of underlying assets, not your platform. That and the way you behave towards your money. Platforms are just a tool, and won’t make or break you either way.
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