Pensions, Savings and Investments

Looking ahead

Pensions are one of the most important areas of long-term savings considerations and one of the most tax efficient. A higher rate taxpayer can contribute £100 to a pension fund at a cost of only £60, so why do so many of us put the matter off?

The maximum level of contributions into a personal pension plan is based on a percentage of your ‘earnings’ for the year but the maximum annual earnings figure that may be taken into account is £105,600 for 2005/06. This limit or ‘cap’ on earnings does not apply to the old style retirement annuity premiums. The percentage also varies, depending on your age.

	% of Net Relevant Earnings 2005/06
Age at the beginning of the tax year	Personal Pensions	Retirement Annuities
35 or less	17.5	17.5
36 - 45	20	17.5
46 - 50	25	17.5
51 - 55	30	20
56 - 60	35	22.5
61 - 74	40	27.5

A single integrated tax regime applies for stakeholder pensions and personal pensions. Stakeholder pensions are designed to be a simplified and flexible version of personal pensions. They are money purchase schemes with low charges.

Most employers are obliged to offer all employees access to a stakeholder pension or to a scheme considered to be stakeholder compliant unless they have an existing defined benefit scheme.

The limit on contributions is the higher of:

£3,600 (gross) per year, and
the relevant limit under the personal pension age and earnings related limits - these can continue at this level for up to five years after the year of the earnings.

In other words contributions of up to £3,600 can be paid each year irrespective of earnings.

Contributions are paid net of basic rate tax. The pension provider will then recover this from the Revenue. Contributions will be eligible for higher rate relief, if appropriate.

Tax Tip

Pension contributions made between 6 April and the following 31 January can be carried back to the previous tax year to take advantage of higher rate relief and/or a timing advantage.

The election to carry back must however be made on or before the contribution is paid. To ensure that you don’t miss out please talk to us before making a payment. These timing limits do not apply to old style retirement annuity schemes. Carry back will be abolished when the new pensions regime is introduced in April 2006.

New rules for the taxation of pensions will be introduced in April 2006. The new regime includes a single lifetime limit of £1.5 million on the amount of pension saving that can benefit from tax relief as well as annual limits on the maximum level of pension contributions. Please talk to us if you would like further information on the new regime.

Tax-free savings

Individual Savings Accounts (ISAs)

ISAs provide an income tax and capital gains tax free form of investment.

You can invest either in a maxi ISA or mini ISAs. The maxi ISA route gives you the option to invest up to £7,000 per tax year either fully in stocks and shares or up to £3,000 in cash with the balance in stocks and shares. Under the mini ISA route, up to £4,000 can be invested in stocks and shares and up to £3,000 in cash. 16 and 17 year olds are able to open (mini) cash ISAs.

Tax Tip

The government is committed to retaining the annual limit of £7,000 until 2010 so a couple starting to invest in ISAs now could save a total of £70,000 by 2010.

Tax efficient savings

There are a variety of other tax efficient savings products, many of which work in completely different ways. You should consider your needs in detail before entering into any commitments. Examples include:

National Savings products - these are taxed in a variety of ways. Some, such as Savings Certificates, are tax-free.

Single premium insurance bonds and ‘roll up’ funds provide a useful means of deferring income into a subsequent period when it may be taxed at a lower rate.

The Enterprise Investment Scheme (EIS) - income tax relief at 20% is available on new equity investment (in qualifying unquoted trading companies) of up to £200,000 in any tax year. CGT exemption is given on shares held for at least three years.

Where gains are reinvested in EIS shares, the capital gains realised on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred.

Venture Capital Trusts (VCT) invest in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends and on any capital gain arising from disposal of the shares in the VCT. Income tax relief currently at 40% is available on subscriptions for VCT shares, up to £200,000 per tax year so long as the shares are held for at least three years.

The ability to defer capital gains by investing in VCT shares has been abolished.

Tax Tip

When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the short and long term. An investment strategy based purely on saving tax is not appropriate.