With profound volatility on investment funds still remembered following the recent stock market crash and credit crunch crisis, many remain wary about where to invest their funds.
Get a 20% Return Immediately From HMRC
Pensions are an interesting investment. It is one of the very few investments where the Government adds 20% to what you invest, whether a taxpayer or not. So for the pension contribution you make, the State adds 20%. That’s a 20% return on your investment before it even starts earning you money! Better still, if a higher rate taxpayer (with taxable income of over £37,400 in 2010/11), then a further 20% of your investment comes back to you through the tax system.
So pensions can be great investments. If aged 55 and above, you can take your tax free cash from a pension fund at 25% of the fund. The balance of the fund can give you an income for life. So, if you are a saver looking for really good returns, you can make a single premium pension contribution every year and immediately take your tax free cash and an income for life, so long as aged 55+ now. You could have a return of around 25% - 30% per year (depending on your age) if you employ this strategy.
Joe earns £60,000 a year and is age 55. He has no other pension funding. He can contribute up to 100% of relevant earnings, with a maximum of £255,000 in earnings. (Note - special rules for high earners at £150,000 plus per annum could be limited to a £20,000 contribution in this tax year).
Gross Contribution £20,000
HMRC uplift at 20% £4,000
Net contribution by Joe £16,000
Joe takes 25% tax free cash (25% x £20,000) £5,000
Joe gets back a further 20% through tax return £4,000 (as a higher rate taxpayer, a further 20% is reclaimable)
Total savings £9,000
Total cost of investment £16,000 - £9,000 = £7,000
Balance of fund for income annuity for life £15,000 – at (say) £70 per month.
You have a number of choices – you do not need to take tax free cash immediately – you can let your funds grow to age 75 and then take tax free cash. You can even take the tax free cash and defer the income. Very high taxpayers need to be careful on their pension contributions and funding.
If aged over 55 consider the benefits of a personal pension plan as an investment. Your fund grows tax free, the HMRC adds 20% to every contribution you make and 25% of the whole fund is immediately available to you as tax free cash. You can take or defer income from the balance of the investment, which would be taxable.
By Tony Granger