The guide top ten: Ensuring a healthy pension need not be taxing

Published on Friday 8 May 2009 20:58

EACH week The Scotsman gives you a top ten guide to pertinent financial issues. It is always good to plan well in advance to get the best out of any pension arrangements, but even late in working life or into retirement there are some canny ways of boosting your retirement income: Turcan Connell's Bob Hair, director of financial planning, and Ian McGowan, director of tax services, offer their top ten tips on advanced retirement planning.

1 SALARY SACRIFICE The national insurance contributions (NIC) earnings limit increased last month, meaning people earning above 43,888 will be paying significantly more NIC from now on.

Salary sacrifice is a good way of avoiding this extra cost, allowing employees to give up the right to part of their earnings, possibly an annual bonus for example, in return for the employer agreeing to make a corresponding contribution to their pension fund. NIC, as well as income tax, is avoided on the additional sums invested in the pension, meaning a cash boost to the fund at no extra cost to the employee.

For example, a 10,000 bonus would potentially increase an employee's tax bill by 4,000 and their NIC liability by 100, leaving a net take home sum of 5,900. By sacrificing this bonus in return for an employer contribution of 10,000 to the pension scheme, the 4,100 tax and NIC cost is removed, leaving the full 10,000 invested in the employee's pension.

2 MAXIMISE PENSION CONTRIBUTIONS Income tax relief at up to 40 per cent on contributions to approved pension schemes makes a compelling case for this form of retirement planning, but the recent Budget announced significant changes. Tax relieved contributions to approved pension schemes are effectively capped at either total earnings for the tax year or an annual allowance, which is currently 245,000. However, those with an income of more than 180,000 will in future see tax relief being restricted to 20 per cent.

3 CRYSTALLISE YOUR LOSSES Liquidating loss-making investments and using the proceeds to make tax relieved contributions to your pension could be a very sensible way of effectively getting the government to subsidise some of your loss. Even where investments are still standing at a gain, it is possible to realise gains tax-free up to the level of the capital gains annual exemption, currently 10,100.

A married couple could realise gains of up to 20,200 tax-free and enjoy further tax relief at up to 40 per cent when investing the sales proceeds in an approved pension scheme.

4 STAKEHOLDER PENSIONS Those not in paid employment but under the age of 75 can make annual pension contributions under the "stakeholder" rules. Contributions of up to 3,600 with the benefit of tax relief at the basic rate of 20 per cent can be made each tax year, so a contribution of 2,880 will "gross up" to 3,600 in the pension fund. Up to 25 per cent of the fund can be taken as a tax-free lump sum at "retirement", with the balance providing an income.

5 IN SPECIE TRANSFERS If you already have a self-invested personal pension (Sipp), you can transfer some assets that have fallen in value into the Sipp as an "in specie" contribution. Tax relief will still be available on the contribution and, assuming the market value of the asset increases in future, any growth in value will be tax-free within the Sipp.

6 SCHEME PENSIONS When you reach 75, you must either secure your pension if you haven't yet done so, or continue drawdown through an alternatively secured pension (ASP). The downside of drawdown is that you are restricted on what you can draw each year, and tax will be payable at up to 82 per cent if you wish to leave some funds for the next generation. A "scheme pension" set up by an actuary is a good way of getting as much as you can out of your pension fund.

As the scheme pension works on the principle that the fund will be spent throughout life, the starting level is much higher than under an ASP.

7 RETIRE ABROAD If you intend to retire abroad and have a sizeable pension fund, it may be possible to transfer the value into a "qualifying recognised overseas pension scheme" (QROPS). This offers advantages in terms of flexibility, taxation and avoiding the "age 75" changes required because you would effectively be removing the funds from the UK regime.

8 UTILISE ALL OF YOUR ASSETS A simple audit of all your investments and assets as you near retirement can establish the income you can generate from each area. Most people don't rely on their pension alone for income in retirement and will use income from cash deposits, investment bonds, ISAs and so on to boost their income.

9 PURCHASED LIFETIME ANNUITIES You don't need to build up a pension fund to buy an annuity. In fact, you can simply buy an annuity if you would like a guaranteed income for life.

As the government views a large part of the income payments throughout life as "getting your own money back", there is little tax to pay on the income.

10 EQUITY RELEASE When all else fails, or if you just prefer not to downsize and wish to boost your income, you can take out an 'equity release' arrangement, which will provide a fund for personal use against the value of your property. Although care has to be taken and it is advisable to get professional counsel on the best way of doing this, it can nevertheless be a useful way of generating additional income.