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Pensions

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Pensions

Recent changes in the 2009 Budget
From April 2011, higher rate tax relief on contributions from earnings above £150,000 is going to be restricted and for those earning over £180,000 it will be removed altogether. These higher rate tax payers will only get basic rate tax relief on contributions above these levels. Although this legislation is not coming into effect for 2 years, the chancellor has pre-empted any plans high earners may have to make large contributions before this time by emergency legislation which will be put through in the Finance Act.

This does mean that high earners need financial advice more than ever before. In simple terms, with higher rate tax relief a contribution of £125 into a pension plan currently costs just £75 for higher rate taxpayers. The same contribution into a pension plan costs basic rate taxpayers £100.
This means that those losing this higher-rate relief will have to put more into their pensions if they want to keep their contribution level the same.
For example, an employee earning £200,000 a year would typically put 6 per cent of their salary into a pension scheme. This equates to a contribution of £12,000 a year, and currently would cost £7,200 after higher rate tax relief.
On this salary this person would only receive basic rate tax relief after 2011, so the same contribution would now cost him £9,600 a year, or an extra £200 a month.
If they do not want to pay this additional sum, then over a 25-year period this loss of extra tax relief would mean their pension pot is worth £174,469 less. This would give them £974 less a month in retirement.
We can help higher rate tax payers to make the decision whether they want to pay the extra out of their own pocket or whether they want to take a cut to their gross contributions and invest extra elsewhere to mitigate the shortfall to anticipated income in retirement. Options include EIS, VCT’s and other offshore planning ideas appropriate for high earners.
We do feel that this change is worrying in that it breaks the link between tax relief at one’s highest marginal rate. We are hopeful that the government will provide assurances that it will not further erode pensions tax relief in future. It is clear that continuous changes actually discourage saving for retirement as individuals become confused and ultimately retreat to inertia which is the worst thing to do. This is where we can help - i.e. to help you see through the maze of legislation and headlines to what really matters and to what you really need to do now, not tomorrow.

Pensions and the credit crunch

Pension plans have taken significant falls in the light of the fall of most asset class markets since the summer of 2007. Unfortunately this has had the effect of deterring many people who need to set up pension plans from doing so and/or encourage existing regular savers to stop or cut back on their monthly payments, basically because they are fearful of investing due to all the negative press coverage regarding investments which many people simply do not understand.
Paradoxically now is actually an opportune time to start a pension or to increase payments into an existing scheme. This is because asset prices (equities in particular) are depressed by historic levels. Stock markets have nearly halved since the credit crunch began, so it is logical to believe that values will grow from here. Of course we cannot say that we have reached the trough of the market or exactly when a recovery will take place. Nevertheless to begin or increase regular savings for retirement at the current time is good advice.

In addition to this the changes in pension legislation have made it possible to hold externally managed funds and single equities within pension plans. Often this is within Self Invested Personal Pensions (SIPPs) or flexible, clear, modern style insured schemes. Taking the time to seek advice as to which investments are held within your pension plan, could mean thousands of pounds difference when you do come to retire. Too few people realise the relevance of this point and this is a key area where we provide value for our clients and ultimately help to make a real difference to their future. Other changes which occurred in April 2006 (“A-Day") mean that savers can now generally contribute more in any one tax year than was previously the case. Therefore if you have left your pension planning until quite late in life, it is now possible to build up a sizeable pension fund in a short space of time (funds permitting of course).

Here are a few questions a prudent Retirement Planner should ask:
  • How is my pension plan performing?
  • Has my pension plan fallen by more then the UK/International equity markets?
  • Exactly what are the level of charges levied on my pension plan?
Some of the older style plans taken out in the 80’s and 90’s can carry very heavy charges, this can make a huge amount of difference to your retirement fund at your chosen pensionable age - we can help a great deal with this.
  • What size is my fund likely to be at my chosen retirement age?
  • Would I be better off using externally managed funds as the investment vehicle within my pension plan? What are the advantages and disadvantages for my situation?
  • Am I fully utilising all available tax breaks via my pension plans?
  • How has the recent budget affected my plans for retirement.
We, at Accudo, are here to help you find the answers to these key questions.