A survey of over 1000 City workers found that 64% expect to receive a bonus from their employer this year, according to research by recruitment firm Astbury Marsden.
The report also showed that top level management are particularly optimistic, with MD’s and partners expecting an average bonus in the region of £99,000.
But, with a lack of time to focus on their personal finances, how can these City workers make the most of their bonuses?
Peter Gale, Senior Wealth Manager at AAG explains, “We are currently advising our clients to think about the best way for them to use their bonus this year.”
“There are a host of changes expected in the Chancellor’s March Budget, which could affect higher rate tax payers.” Peter explains. “Many may have used salary sacrifice in the past for investing their bonus into their pension – but if the expected changes go ahead in March, and this exceeds their annual allowance, this could cause an increased tax charge.”
So what are the options?
“Pensions are still a sensible option,” Peter confirms. “But, you need to ensure that you won’t be penalised because of the contribution. There’s the annual allowance and lifetime allowance to consider.”
With average growth, you could be closer than you think to the lifetime allowance. “We are spending time with our clients looking at all of their various pension plans to ensure that they aren’t setting themselves up for an unexpected tax bill later down the line.”
“A possible change in tax relief, could also see you lose up to 20% of the tax relief historically available. Which means that Pensions shouldn’t just be entered into blindly after these announcements.”
Investing into an EIS or VCT could provide an alternative option. With 30% tax relief available on any amount invested, it has certainly gained in popularity.
“The government continues to encourage investors into the EIS and VCT market,” Peter explains “and they are already beginning to form a core part of many people’s retirement plans.”
With the squeeze on pensions, EIS and VCT are starting to move into the mainstream. But, as they are a higher risk investment, it’s vital that advice is from a financial advisor experienced in the EIS/VCT arena to ensure they are investing in the right portfolio.
“With a limit of £15,240, ISAs still provide a tax efficient way to invest money for the short to medium term. But, as you can only have one ISA per tax year, it can only form part of a financial plan,” Peter reminds.
“After fully considering the alternatives, you could always opt to treat yourself to a little guilt free enjoyment!”
EIS/VCTs are not for everyone, and should be used to complement a diverse portfolio, and only with professional advice.