News/Events

Tax Band Changes [22nd May 08]

There are many hot topics at present or should I say “hot potatoes” after the abolition of the ten pence tax band that has caused widespread dissent. The lowering of the previous tax band of 22% to 20% has also provoked much discussion with the media focusing on people’s take home pay.

As I mentioned in an article earlier this year, the corollary is the reduction in pension tax relief thus lowering the amount paid as you only receive a saving of 20p in the pound and consequently the final pension benefits will be less. The longer the potential period up to retirement, the worse the position will be eg if your net of tax contribution before the 6^th April was £78.00 you had £100.00 invested but this will now only be £97.50.Many people will still be unaware and a well known personal financial planning magazine is launching this month a campaign endeavouring to increase people’s awareness of the change made.

Having said that, I believe our industry should also try and make people review their old pension plans full stop! And regardless of whether contributions are being paid or have been stopped.

I am frequently asked by my clients about the pension statements they have received and especially when the fund value at normal retirement is less than the value quoted today even assuming a 5% annual rate of growth. In these cases, it is not uncommon for this to be due to an “old” type of pension plan being held by my client. Regrettably before the introduction of Stakeholder Pensions in 2001, most personal pension plans had various charges applied to the contributions paid or the actual value of the plan.

Typically, there was a monthly policy fee of £3 or £4 which increases yearly in line with an index e.g. RPI. Then there was what was known as a “bid & offer” spread which is really an initial charge and usually 5%. In simple terms you buy units at the offer price and value these at the bid price when valuing the plan. On top of these charges, some companies had a nasty habit of buying initial units in the first two years of the plan which had a lower value or a higher annual management charge.

What many people also do not understand is that the monthly charge can still be taken even if premiums have been ceased and this has a disastrous effect on the final value especially in a poor performing fund. That is not all, as most companies will make a further charge if you were to, say, retire before the normal retirement date or perhaps transfer to another company.

It is not surprising that many clients became disenchanted with investing into pension arrangements but with the advent of Stakeholder Pensions, many of these charges have been removed. In these circumstances, there could be the prospect of being able to re-deploy your contribution into a new plan offering a much more competitively priced contract and this could be strangely the same provider with whom you are already investing.

There is no doubt you should review your pension plan now and especially if you took it out before 2001 and contact your IFA to see whether an improvement could be made. There could be quite a tricky calculation to be made if the existing provider wishes to make a charge as this would have to be set against possible future savings in the current charges.

I believe, frankly, the product providers should be able to identify their own policy holders that could benefit from changing internally with them or is that simply too much to ask?

Langtons is offering a free pension performance review, offer closes 6^th June so contact us to arrange yours now!

This article was written by Langtons - Published in the Western Morning News, Money, 22nd May 2008