Money Matters

Stakeholder Pensions

Stock markets are funny old things! They do not like uncertainty, and so have been jittery, all the way up to the American elections. As soon as stability (in the victory for President Obama) arrived, world stock markets took a nose-dive, and started worrying about other matters, such as the Greek debt, and a slowdown in China.

As a result, I have been pondering, again, on how individuals can go some way to ensuring a positive return in the current investment climate. It occurred to me that one way of being reasonably sure of making a profit, in the short term, is by using a Stakeholder Pension Plan. “A pension” I hear you cry, aghast, “but how?” Well, firstly it should be understood that this profit is subject to certain restrictions as to its availability. Nobody said these matters were simple.

Anyone under 75 can have a stakeholder pension. Contributions are made net of basic rate income tax, so the maximum contribution, without further evidence of earnings of £3600 actually costs £2808 (higher rate tax relief, if applicable, is claimed from the Inland Revenue). One can make a contribution, and then, almost immediately, take the benefits from your plan. The rules state that from age 55 you are entitled to 25% of the fund as tax-free cash, the balance to be used to purchase an annuity to provide an income. So, for a basic rate taxpayer aged 56, a net cost of £2808 should produce an income of approximately £100 per year for life, an effective return of 3.56%. This rises to around £300 p.a. or 10.5% for a 74 year-old. Not too bad a return, given current interest rates.

It is wise to remember, though, that you do not have access to all your capital, as you would have with a normal investment or savings account. You do, however, have the right to take 25% of your pension as a tax-free cash lump sum. If this is done, then the figures above will reduce to a net cost of £1908 and income of £75 at 56 and £225 at 74. Higher rate tax-payers will benefit from increased tax relief at the outset, and if they expect to return to basic rate tax-payers in retirement, then a further advantage would be gained. The greater the contribution that you qualify to make, then the greater the number of providers would be prepared to quote for the annuity and the keener the rates that they would be likely to offer.

Of course, pension plans are intended to provide a means of long-term saving for retirement, and properly planned and executed, a very fine means they are, but in the wonderful world of financial services, things are not always what they seem. Contribution limits vary in accordance with earnings. The above figures are illustrative, and the concept is generic, so specific advice should be sought before entering into any such arrangement.

Finally, if anyone is considering Inheritance Tax planning, Stakeholder Pensions can also be bought for minors, meaning that grandparents can purchase them for their grandchildren, giving the youngster’s pension planning a significant start, and reducing the donor’s estate in the process.

I would like to wish all our readers a Happy Christmas and a Healthy, Peaceful and Prosperous New Year.

David Foot  


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