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 £102,000 for 2004/05. This limit or ‘cap’ on earnings does not apply to the old style retirement annuity premiums. The percentage also varies, depending on your age. A single integrated tax regime applies for stakeholder pensions and personal pensions.

% of Net Relevant Earnings 2004/05
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

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:

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. The government has announced its intention to abolish carry back with effect from April 2006.

The government plans to introduce new rules for the taxation of pensions in 2006. The proposals include 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 for further details on the proposals.

Tax-free savings

ISAs

Individual savings accounts (ISAs) provide an income tax and capital gains tax free form of investment. The maximum investment limits are set for tax years. To take advantage of the limits available for 2004/05 the investment(s) must be made by 5 April 2005. Stocks and shares, cash and life insurance can be held in an ISA.

ISA Investment Limits
Max. investment per tax year: 2000/01 - 2005/06
Maxi ISA £
Overall limit 7,000
Stocks and shares up to 7,000
Cash up to 3,000
Life assurance up to 1,000
Mini ISA £
Overall limit 7,000
Stocks and shares up to 3,000
Cash up to 3,000
Life assurance up to 1,000

In practice most ISA providers are selling ISAs solely investing in stocks and shares (maxi or mini). Banks and building societies are providing mini cash ISAs.

Note that if, say, a cash mini-account is opened, no maxi-account can be opened in the same tax year so that only a mini stocks and shares ISA can be opened (which is limited to a £3,000 investment).

Tax credits on dividends received by ISAs are no longer repayable from 6 April 2004.

16 and 17 year olds are able to open (mini) cash ISAs.
TESSAs

Although no new TESSAs could be opened after 5 April 1999 existing accounts were allowed to run their full five year term. On maturity, the capital may be transferred into a TESSA-only ISA without affecting the annual ISA investment limits but this must be done within six months.

PEPs

Like TESSAs, no new PEPs could be opened after 5 April 1999. Existing PEPs can be retained, however, the main tax advantage was that the 10% tax credits on dividends received by a PEP were repayable but this is no longer the case since 6 April 2004.

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 (from 6 April 2004) 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 at 20% is normally available on subscriptions for VCT shares, up to £200,000 (from 6 April 2004) per tax year. This percentage of relief, however, doubled to 40% for shares issued between 6 April 2004 and 5 April 2006. Capital gains can be deferred into VCT investments in a similar way to EIS but only on shares issued before 6 April 2004.

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.