Member Article

Personal Pensions: They are worth having

MANY well-publicised difficulties with underfunded company pension schemes and over-complex and seemingly ever-changing legislation has left many people confused and questioning whether personal pensions are worth having at all.

However, ignoring personal pensions when considering your long-term savings options will mean ignoring the real advantages they offer when compared to other types of savings. These include tax relief, tax-efficient growth, the potential to reduce your national insurance contributions and shelter from inheritance tax.

Tax Relief: Contributions made into a personal pension qualify for income tax relief as long as they are within the maximum set by Her Majesty’s Revenue & Customs (HMRC). This means that a £100 gross contribution can cost a basic-rate taxpayer £80, a higher-rate taxpayer £60 and an additional rate taxpayer £50 net of income tax relief.

Also, a person with taxable earnings between £100,000 and £115,000 would receive an effective tax relief of 60 per cent due to their income tax allowance being partially re-instated.

Tax-efficient Growth: personal pensions grow virtually tax-free. Authorised underlying investments are not subject to capital gains tax. The majority of income tax is also avoided, except for the basic rate credit on UK dividends which is withheld.

Save National Insurance: Through a mechanism called salary sacrifice it is possible, if your employer agrees, to sacrifice part of your salary and receive an employer-contribution instead. This has the double benefit of saving income tax while also removing the need to pay personal national insurance on this proportion of your remuneration. Depending on your level of income, the saving can be as high as 12 per cent of the amount sacrificed.

Your employer will also avoid paying employer national insurance contributions, usually at a rate of 13.8 per cent, which they could agree to pay into your pension as an additional contribution.

Inheritance Tax: Under current legislation, personal pensions are not considered part of your taxable estate when you die and will therefore not be subject to the potential 40 per cent inheritance tax suffered by other types of savings like ISAs.

In spite of their clear advantages, personal pensions are not for everyone and careful attention must be paid to the contribution limits, to ensure you receive the tax reliefs, and the type of underlying investments you should choose to ensure the amount of risk being taken is suitable for you.

As with other investments, the value of personal pensions can rise and fall. Anyone considering starting a personal pension should seek independent financial advice before doing so.

This was posted in Bdaily's Members' News section by Harry O’Connor .