I went to a book launch last Saturday with a favourite friend. The novelist gave a short talk: the book sounded great; she looked calmly glamorous* and I was impressed. Perhaps, I said to my friend, I might try writing fiction. “Surely”, she said, “you already have”.
She had read last week’s article earlier in the day and noted that I had made a mistake on the tax treatment of any excess pension holdings over the new lifetime allowance (LTA – £1.25m from April). I had suggested that everyone pays the same punitive tax rate of 55%. But it isn’t quite that simple.
Instead, you pay a flat 55% on any excess you take as a lump sum, and then a rate of 25% on top of whatever income tax rate you are paying on the income generated from the excess. That works out at 55% if you are a 40% taxpayer, but less if you are a 20% taxpayer, and more if you are a 45% taxpayer.
My apologies if not all of you wanted that much detail on a situation you hope to never find yourself in.
Helpful comments from financially literate friends aside, last week’s piece on avoiding paying extra tax on your pension by keeping your savings below the LTA brought me a rather bigger mail bag than usual.
One reader suggested that the tax might be a price worth paying. If you are getting 40% tax relief, plus your National Insurance and your employer’s National Insurance paid in up front, and you then make adequate returns over a couple of decades, you should end up ahead even after paying the 55%.
Other readers figured that continuing to save and hoping that would be the case would rely on too many tax rates and allowances staying constant (when we know the only constant in the tax and pension regime is change).
But most were just horrified to realise just how easy it is for even moderately devoted savers to end up hitting the LTA. And they want to know where else they can put their money where it will be reasonably safe for the next 25 to 30 years, and hopefully attract a tax advantage or two along the way. “Don’t just leave us there”, implored one reader.
So, what can you do that is both long-term and tax-efficient if I have now scared you off saving into your pension? Plenty of things.
There’s buy-to-let. I wouldn’t encourage it, given how expensive houses are relative to history, but it’s a perfectly valid way to create a long-term income if you can afford enough properties to be diversified, and you aren’t much bothered about medium term capital values.
There are Isas. Always fill these before you do anything else – any income from them is tax-free regardless of when you take it, and (for now at least) how much you have in your wrapper. No 55% charges here.
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Then, there are venture capital trusts. I looked at these a few weeks ago, so regular readers will know that I am not keen on them at all. But you can’t argue with the tax reliefs and they can’t, surely, all be awful.
Finally, there is one sector that isn’t particularly well promoted and which I suspect very few readers have any exposure to at all – forestry. I’m going to tell you right away that last week, a forestry management firm – FIM – took me on a helicopter trip around southern Scotland and Northumberland to show me a few forests, a sawmill and a processing plant. I also want to make it absolutely clear that my positive bias towards the sector comes not because of the trip, but in spite of it. I hate helicopters.
Back to the reason FIM rented the helicopter in the first place. It is expanding its FIM Sustainable Timber & Energy LP – effectively a fund that invests in forests. That’s because they see demand for their end product, timber, rising steadily (emerging-market demand, house building at home and the increased use of biomass** for energy).
But it is also because there is a new supply of “good quality plantations” coming on to the market – some long-term holders have been selling into rising prices and the Forestry Commission is also a seller. That, says FIM, gives them an opportunity to buy land to hold for a profitable long term.
I’m generally convinced by the basic argument. The supply and demand dynamics make sense, and right now, while prices have risen, forestry land isn’t particularly expensive (about quarter the price of agricultural land). It should – like other real assets – also provide some long-term inflation protection. That’s something I suspect we are all going to need more than we think.
However, the reason I put it forward as a pension alternative for the well-off is that it does come with tax reliefs – there is no inheritance tax payable on forestry investments (after two years) and capital gains and income raised from the trees themselves (not the land) come tax free too. And the long-term bit? The fund will terminate in either 2021 or 2031 depending on what its shareholders vote for.
There’s more good news in the nature of the management. The total expense ratio is pleasingly low at 0.61% (trees aren’t that tricky to manage) and the fund is targeting an annual dividend of 3%. The new money will be partially (20%) invested in renewable energy with a view to creating that stable income (they made me view a windfarm from the helicopter, too).
There are risks in all this – timber prices might fall, tax law might change and there could be liquidity problems. The third is the one to worry about the most. If you want to sell your shareholding before the fund is wound up, you will have to ask FIM to help you find a buyer. That hasn’t been a problem during the rush to real assets of the last few years, but if interest rates ever normalise, it could be.
The key point here is that forestry isn’t for saving amateurs. It is likely to be a nice alternative investment for those who are already pretty rich (note that the minimum investment in the fund is £43,000) and who have a ten to 20-year time horizon.
And it also makes sense for the very rich: if you sniff at investing a mere few hundred thousand in something – and I know some of you do – you can ask FIM, or one of its competitor agencies such as Egger Forestry or Tilhill to find and manage a forest just for you.
However, you will only want to do this if you like helicopters. Being rich and owning land appears to involve a lot of helicopter trips.
* Lucy Lawrie – this is the book: Tiny Acts of Love.
** Biomass sounds as if it is something rather sophisticated, but in the context of energy production in the UK, it basically just means wood.
• This article was first published in the Financial Times.