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Pension contributions grow as tax incentives become more valuable; outlookonwealth.

High earners have been feeling hard done by in recent times with income tax now reaching 50 per cent for some and effective rates even higher for people in certain income bands, due to the personal tax allowance being taken away, writes Paul Korobejko, wealth manager at Torquil Clark However, recent changes in the rules surrounding pension contributions are bringing much needed benefit to some of those affected.

A leading player in the market for Self Invested Personal Pensions (SIPPs) is claiming that contribution inflows to their SIPPs are currently running at 170 per cent higher than for the same period last year.

This is mainly down to the recent changes in the taxation and contribution limits, making it attractive for high earners to make pension contributions at higher levels than they may have done in the past. The main changes to influence this can be summarised as follows; Anti-forestalling rules were previously put in place which limited most high earners (with income of more than pounds 130,000) to contributions of between pounds 20,000 and pounds 30,000. These limits have been replaced by an annual allowance of pounds 50,000 which means that many will be able to make higher contributions, either personally or through their employer company.

The government's own statistics indicate that people paying 40 per cent tax will increase by 20 per cent this year and people paying 50 per cent tax will increase by 12 per cent this year. This means that there are a lot more people who will want to shelter some of their income from these high rates of tax by making pension contributions. Nowadays, pension contributions are just about the only way to obtain full tax relief.

Carry Forward has been revived which means that unused contributions going back three years can be mopped up. Potentially, this allows contributions of up to pounds 200,000 to be paid either personally, or by employers, with full tax relief. So what is the best type of pension plan to have if you wish to make a large contribution, or if you already have a sizeable pension pot in place? To a large extent this depends on whether or not you have a say in where and how your pension fund is placed. If you are in a company sponsored scheme it may be the case that this is decided for you by the employer and you have to fit in with that.

However, if you are able to make your own arrangements, the choice is usually between a Personal Pension or a SIPP. A Stakeholder plan is also an option, but many will find that the choice of investments somewhat limited.

Nowadays, Personal Pensions offer a wide range of investment funds with most of the major investment houses. The selection of funds can be tailored to suit the individual's preference and tolerance to investment risk. There was a time when personal pensions were loaded up with high front end charges to pay for expenses and commission to the adviser. Modern plans are much more transparent and offer good value. Charges will usually depend on the level of fees agreed with an adviser and the investment funds selected.

Some funds are more expensive to run and manage than others because the cost of buying in certain markets can vary widely.

If you prefer a wider investment choice and the level of fund is adequate a SIPP might be the better option. Again, SIPPs used to carry high charges but these days offer much better value. Most SIPP providers charge fixed administration fees, which means the higher the amount invested, the lower the overall effective cost.

Within a SIPP you can invest into Unit Trusts, OEICs, Investment Trusts, Shares, Gilts, Corporate Bonds, ETFs, Commercial Property, Structured Products, Bank Deposits plus other less common types of investments.

SIPPs are usually administered by specialist SIPP companies, or often insurance companies. Be careful; some SIPPs offered by insurance companies can be a little more restrictive in the investment choice and may not offer the full Monty.

The cost of taking advice is agreed up front and usually built into the pricing of the pension product, whether it be Personal Pension, Stakeholder, or SIPP. It is possible to bypass an adviser and do a "DIY" SIPP at very low cost, but this is really only for those financially savvy who have the knowledge and confidence to go it alone.

Whichever route you take with a pension, when it comes to the time of retirement you will have all of the options available. That in itself can be a daunting prospect which almost certainly will demand professional expert advice.


Paul Korobejko
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Publication:The Birmingham Post (England)
Date:Jun 16, 2011
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