There are some very lucrative, but potentially very short, careers placing individuals in quite unusual circumstances when preparing for their retirement. Sportspeople, dancers, singers and reality TV stars are just some of those that may have high volumes of money to invest during the short lifespan of their lucrative careers. The issue is making the investments last throughout their very long ‘retirement’.

As Spence Head of Trustee Advisory Services Alan Collins succinctly puts it: “While the fame may last only for 15 minutes or so, investing for and living through retirement will inevitably last a lot longer.”

Killik & Co managing director of financial planning, Sarah Lord, goes further, explaining: “Given that typically most sportspeople and dancers etc have to retire from their primary profession by their mid – thirties there is a very long time to retirement, particularly given that life expectancy is increasing too, which means that a sportsperson could in theory be ‘retired’ for 50 years.”

Saving options

With high volumes of cash available to invest upfront, the key requirement for individuals in these careers is to save money as tax-efficiently as possible, by utilising all the tax relief and tax allowances (“and remember, tax avoidance is allowed”, Collins adds) available to them on an annual basis.

ISAs are more likely to be favoured by people in these types of careers, as opposed to pensions.
According to Lord, these people should pay the maximum into an ISA each tax year “to benefit from the tax-free growth and importantly be able to access their ISA funds at any age”. Therefore an ISA portfolio could provide them with a good income stream later in life, she adds.

Collins agrees that ISAs’ taxed exempt exempt (TEE) model is likely to be popular for these individuals, as “although the tax would be paid up front, later investment return and income would be tax free”.

Compared to the current pensions annual allowance situation where substantial contributions would be mostly taxed, “TEE would be a winner for these guys”, he adds.

However, they should maximise the available pension tax reliefs and maximise their pension contributions, Lord says, “although from next tax year the level that they will be able to save into a pension is likely to be far less”. This is because many in this position are earning in excess of £150,000, meaning they are likely to see their annual allowance reduced to £10,000. But, “if they have not maximised contributions in the last three years they should also look to make use of carry forward in the current tax year,” she adds.

PMI president Kevin LeGrand agrees that the pensions tax system, as currently configured, is not particularly friendly to this type of saving situation, “as the annual allowance is low and so favours longer-term saving over short bursts”.

While paying the maximum annual allowance is generally recommended where possible, this could potentially cause problem with regards to the lifetime allowance.

“Because of the (steadily reducing) lifetime allowance (LTA) these workers’ payment of maximum AA contributions early in their working life may cause them to exceed the LTA by the time they come to access their benefits,” LeGrand explains, “which puts them in an unfair position relative to a person who has a steady income over their entire career but who may make the same level of contributions over their career.”

Saving into the pensions systems may be made more difficult for those with high volumes of cash to invest, but at the ‘outcome’ end, the rules are friendlier for these individuals.

“The potential flexibility conferred by freedom and choice will be very useful to them in the light of their uncertain employment future after the short-term lucrative spell ends,” LeGrand states.

However, they will need to take care that the arrangement in which they invest will either allow access to the full range of options permitted under freedom and choice when the relevant time comes, or that they will be able to move easily and without excessive penalty to somewhere where they will have access to those options, he adds.

There are also other investment products, beyond ISAs and pensions, suitable for these types of savers.

“Given that some sportspeople and pop stars are in the fortunate position to receive significant income, this means they are also likely to have significant tax bills, so for a small proportion of their wealth they could look to invest in VCT’s and EIS’s to benefit from the tax reliefs that these investment vehicles offer,” Lord says. “Although, given the nature of such investments and them being high risk I would only recommend a small proportion of their overall wealth is invested into such vehicles on an annual basis.”

Investment strategy

No matter the vehicle/s used, it is recommended that individuals in short term, high remuneration careers invest significantly more than the average to fund their retirement. Anywhere in the region of 25-50 per cent is cited as reasonable figures for these people to put aside for their retirement.

So, having established how much of their money to put aside, and in what vehicle, the next question is where they should invest their money.
Lord recommends that, as with any saver, a diversified portfolio is requiremed, which covers exposure to property, fixed income and equities.

“In terms of investments, I would say it is important to seek out assets that are most likely to provide capital growth over the long-term, so equity and property are likely to feature highly in such a portfolio,” Collins states.

“This should switch eventually to more income seeking stocks, perhaps equity stocks with a solid dividend or income generating bonds. The switch to income seeking assets is likely to be very far into the future for this group, so they may have to ride out the odd stock-market bump or two,” he adds.

However, if the individual goes on to pursue another, possibly less lucrative, career after their first ‘retirement’, they will not need to draw upon their investments for a longer time period, meaning they can potentially afford to take a higher degree of risk with their overall portfolio, Lord adds.

For Garbutt + Elliott director Allan Dodds, the sensible investment approach would be to build a long-term strategy rather than look for short-term gains.

“This can help to minimise the impact of tax and ensure protection for what could be a very long retirement, especially in those industries where a career could be finished by injury at any time,” he explains.

According to Dodds, with a long-term strategy there would also be no need to make drastic changes if the individual moves into a lower paid job.

“There would be tweaks of course, and they may choose to cut back on some of the more speculative investments, but the fundamental strategy need not change,” he says.

However, LeGrand warns that the saver will need to carefully consider the tax implications of accessing any of their pension funds while still working, to supplement their later, lower, employment income.

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