THE INDEPENDENT MAGAZINE FOR LEGAL PROFESSIONALS
feature archives



 

 


Personal Pensions: Single Payments Can Ease The Way

By Abigail Morrison, Marketing Development Manager Standard Life


Single payments are especially useful for the self-employed who may not want to commit themselves to paying large regular amounts into their pension plan, as it can be difficult to calculate exactly what their income will be. Single payments can also be made on an ad hoc basis - perhaps if your earnings are more than expected.

 

We should all know by now that we need to make sufficient pension provision for our retirement. It is becoming increasingly apparent we cannot rely on the state to keep us in the style to which we are accustomed.

However, the whole area of pensions has become increasingly complex in recent years, and it is often difficult to know what to do for the best. What type of pension plan is best? How much should you save? Should you pay in regular or single amounts?

Many factors should be considered before answering each of those questions, but we are generally agreed that when we look forward to retirement we hope to be as comfortable as possible. Ultimately pensions are for anyone who wants to maintain a reasonable standard of living when they retire. And, for the self-employed who don't have access to a company pension scheme, the only real option is to provide one for themselves.

Personal pensions allow you to save in a tax-efficient way for retirement - payments receive Income Tax relief automatically at the basic rate of tax. For example, if you decided to pay £100 per month gross towards your pension you would actually only pay £78 net of basic rate tax. And, if you were a higher-rate taxpayer you would be able to claim an additional £18 for each monthly payment you make, through your tax return. Your investment will also grow free of UK Capital Gains tax, you can take up to 25% of your fund as a tax-free lump sum and, importantly, your dependants will usually not have to pay tax on any lump sum they receive should you die before retirement. When your pension comes into payment it will be taxed in the same way as your earned income.

To be eligible to pay into a personal pension you should be ordinarily resident in the UK, and under 75 years old. You can decide how much you pay into a pension, but the more you invest the larger the pension when you retire. However, there are limits on both the minimum and maximum amounts that you can pay - most providers set a minimum and the Inland Revenue sets the maximum. Single contributions are exactly what they say they are - one-off payments that can be paid in addition to, or instead of, regular amounts. They are particularly useful if you want flexibility in making payments. For example, single contributions can also be combined with a basic level of regular amounts to top up your pension fund when you can afford it. Most providers also set a minimum amount for single payments.

The Inland Revenue limits the maximum amount you are allowed to invest in a pension plan each year without 'evidence of earnings' - currently this is £3,600 in total each year. However the Inland Revenue will allow you to pay more than this based on a percentage of your 'Net Relevant Earnings'. Broadly speaking these are the taxable profits from being self-employed or the 'before tax' earnings from employment. The percentage allowed varies according to age. The allowances for the 2003/2004 tax year are as follows:

Age (at beginning of tax year) Percentage of Net
Relevant Earnings
35 or less 17.5
36 - 45 20
46 - 50 25
51 - 55 30
56 - 60 35
61 - 74 40

For example, say in the current tax year your annual earnings before tax are £60,000 and you were aged 44 during the tax year. If you are currently paying 10% into your personal pension on a monthly basis this would equate to £6,000 a year or £500 per month.

 

Based on this year's allowance it would be possible to pay a further 10%, or £6,000, into your pension plan by increasing your regular payments or by making a single payment at any time during the tax year. As can be seen from the table above, the nearer you are to retirement age the greater the amount you can invest in your personal pension. Single payments also benefit from the same tax advantages as regular payments.

Single payments are especially useful for the self-employed who may not want to commit themselves to paying large regular amounts into their pension plan, as it can be difficult to calculate exactly what their income will be. Single payments can also be made on an ad hoc basis - perhaps if your earnings are more than expected.

A single payment can usually be made in a number of ways - by cheque and more frequently now by direct debit. More and more providers offer the facility whereby you let them know how much you want to pay, and they collect it by direct debit from your bank account on a date that suits you. With no forms to complete this method should cause you the minimum amount of inconvenience.

As well as making single payments into your own pension arrangements you can pay into a Stakeholder pension for your spouse and for each of your children. Stakeholder pensions were introduced in April 2001 and were intended to be flexible and easy to understand with a maximum annual charge of 1%. They have given people who might not otherwise be able to have any pension provision in their own right, e.g. a spouse not in paid employment, the opportunity to have some pension entitlement of their own. Again, investing in a Stakeholder for a family member will benefit from similar tax advantages - for example, the taxman will increase a net investment of £2,808 to £3,600.

In conclusion, having appropriate pension provision has never been more important. People are living longer so many are enjoying a longer period of retirement than ever before. We also expect more out of our retirement, and while the state pension might cover the basics, on its own it is unlikely to provide the kind of retirement most of us would hope for. Many of us will already have a pension of some description, but how often do we actually review the amounts we pay into it, especially if we are self-employed? There are also other factors to consider before deciding whether to pay higher regular amounts or to pay single amounts so you should seek advice if you're not sure how much to pay. Fluctuating income and other unforeseen expenses may make commitment to regular payments difficult. Consequently, a combination of both payment methods may be the best approach for many people.


Notes

1. Tax and legislation are likely to change. The information given here is based on Standard Life's understanding of law and Inland Revenue practice at the date of publication.

2. Tax relief may be altered and its value to the investor depends on their financial circumstances.

Abigail Morrison, Marketing Development Manager
   
Search WWW Search The Barrister