Tax Planning: Feather Your Nest with Tax Breaks Saving for Retirement Is Crucial, Writes Tony Lyons
Lyons, Tony, The Independent (London, England)
We all need to save more if we are to enjoy a comfortable retirement. To encourage us, there are some extremely generous tax breaks on offer when you save in a company or personal pension scheme. You get tax relief on all contributions at the highest rate of income tax you normally pay (so you get back 23p or 40p for every pounds 1 you put into the pension).
And after the next election, the Government will be introducing stakeholder pensions, which will also qualify for generous tax breaks. These will be low-cost portable pensions we can take with us when we move from job to job. If you are not in any pension scheme at the moment and do not have the chance to be in a company scheme, it may be worth making alternative arrangements, such as saving in a PEP or a new ISA. This will allow you to build up a lump sum. You can then transfer it to a stakeholder or other pension scheme whenever you feel ready.
If you are already in a pension scheme, you should check what it offers and whether it would be worthwhile paying in more. Around 11 million people are members of company pension schemes, where contributions are paid by both the employer and the individual. The best of these, called final salary schemes, pay out a pension equal to two-thirds of the member's final working salary. Many company schemes are now run as "money purchase" arrangements or as group personal pension schemes. These work in the same way as a personal pension; you have to save up in an underlying investment fund, providing a pool of money at retirement. The amount of money you get depends on how well your investments have performed. There is no link to your salary. The other massive problem is that most of us will have to swap most of this money for a contract to provide an annual income when we retire. This is called an annuity and the amount you will get back depends on interest rates and the yields from ultra-safe government bonds called gilts. At the moment rates are very low. People retiring and buying an annuity are getting less than 4 per cent annual income from their retirement funds. So a person with pounds 300,000 saved in a pension fund would get just pounds 12,000 a year. This is unlikely to change and the Government's stakeholder pension plans do nothing to address the issue: another reason why you may want to keep control of some of your retirement cash rather than locking it away in a pension. The current low annuity rates also make it foolish to accept the old- fashioned but widespread advice that you should move your money into "safer" funds in the years before your retirement. Most of us will need to keep generating as much growth as possible, right up to retirement. Only those people who stay in a "final salary" pension scheme until they retire will escape the problem of plummeting annuity rates. Final salary schemes are run by large companies and by public sector bodies but because of the expense an increasing number are no longer providing new staff with final-salary schemes. Whatever company scheme you are in, you might want to make additional voluntary contributions (AVCs). You can put up to 15 per cent of your salary into pension contributions, with tax relief at your top rate of income tax. …