News/Events

Ensure pension plans give maximum retirement income [11th February 08]

Everyone is always happy to see the Government in power to reduce tax in a Budget and last year, it was the first time for many years that this happened to Basic Rate Tax. It was reduced from 22% to 20% but, as usual, one gets a little and gives a little and sometimes more!

The spin off to the saving is that everyone who contributes to a pension plan will now pay more as the relief given has been reduced by 2% whether this is dealt with at source or from your actual bank account.

Although this applies to all personal pension plans, I have just written to all my Company clients with whom I have set-up Group Personal Pension Plans to confirm the change. It sounds so simple because either the employee will have to pay more for their pension contribution or get a lower pension when they retire as 2% less will be invested. For example; if you currently are having £50.00 deducted from your salary, the Government is giving £14.10 and you are having £64.10 invested. From 06/04/2007, it will be only £62.50 invested and this will make quite a difference to your resulting pension plan fund and especially if you have, say, 25 years to your prospective retirement date. Will this be 60, 65 or 70 as the longer away it is, the bigger the difference? The smaller the pension fund, the less pension income in retirement.

For employers, beware as it is not as straight forward as it sounds and not just a case of increasing the amount they are deducting from an employees salary. Well, it is simple for all payments collected and sent to the Insurance Company after 6^th April next but

1) Many employers deduct an employee’s March payment from their salary at the end of that month and send it to the respective Pension Company at the beginning of April. They need to receive the payment before 6^th April 2008 if they are to be able to collect the 22% tax relief from HMCR. If they receive payments on or after 6^th April 2008, they will only be able to collect 20% tax relief on an employee’s payment.

2) Similarly, for an employees April payment and a lot of direct debits are arranged to pay out near the start of a month, if the Pension Company receive the payment before 6^th April 2008, they are able to collect 22% tax relief from HMCR. If they receive the payment after that date they will only be able to collect 20% tax relief.

This may well cause a good deal of confusion but on the brighter side, should anyone be thinking of making a single contribution payment into their plan, then again it should be done before the 6th April as not only will it be set against their income for the current year but also will get effectively an extra 2% invested.

You should, of course, consult your IFA as now looks like a good time to review your existing pension plans to see that are on track to provide you with sufficient income in retirement.

This article was written by Langtons - Published in the Western Morning News, This is Money, 11th February 2008