Twin Pots and RA’s - From a good to a great investment
Way back in the financial services dark ages…. the nineteen sixties, the only way to save pre-tax money towards retirement was to be in formal employment with an employer who offered pension membership as a perk. At that time, the savings industry successfully persuaded the government to offer a tax incentive to sole traders and other self-employed people to save for retirement, and thus the Retirement Annuity (RA) was born.
RAs quickly became the premier savings vehicle for Doctors, Lawyers, Accountants, Architects and other businesspeople and professionals who were self-employed. RAs are also used by employees who earn commission or big bonuses and want to put some funds aside for retirement. They all found benefit in the fact that, not only were the contributions tax deductible, but all the growth in the funds was exempt from Income Tax, Capital Gains Tax and Dividends’ Tax. To top it off the benefits paid to loved ones on death were totally exempt from Estate Duty. It was no surprise that an annual ‘RA season’ developed in January/February each year as members scurried to top up their RAs before the end of the tax year.
So, what was the catch? Well, there was no way to access any of your RA savings unless you died or retired after 55. With a Pension Fund if you changed jobs, you could get paid out your accumulated funds. This inflexibility made investors careful not to put too much money into an RA and led to heartache and even suicide when a member in financial difficulty, found that they could not access their life’s savings under any circumstances.
So, what changed in September 2024? The so-called twin pot system offers huge benefits to RA members because, for the first time in history, you can now access a part of your savings before retirement. This new rule means that a sole trader or other professional can use the RA to smooth out his taxable income over multiple tax years. If, for example, in 2024 as an architect you have just earned massive fees from a project you can safely put 27,5% of the income from that project into an RA and immediately get a tax deduction reducing the tax paid in that year. Let’s say the following year does not go well. In terms of the new rules the architect can draw up to one third of his contributions plus growth to top up his lower trading income. So, over time, self-employed members of RA’s will be able to shift taxable income from good years into poorer income years and at the same time safely invest more of their excess income knowing that an amount is always available in times of hardship. So, from September 2024 RAs moved from being good investments to great investments.