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— investment advice —
THE BACK OFFICE
the
manager
WINTER 2011
relief on the money put into a pension
(up to £50,000 of contributions
a year, subject to the contributor
having sufficient earnings, i.e. taxable
earnings above the amount that he or
she wishes to contribute), it’s got to be
worth a second look.
This is particularly the case when
the rules on how money can be taken
out of the pension at retirement
have relaxed so much in recent years.
People are still obliged to wait until
they are 55 to access their pension
money, but the days of compulsory
annuities are long gone and with
‘flexible drawdown’ pension holders
can now access all of the funds within
their pension at one time, as long as
they can demonstrate that they have
sufficient secure income in place.
The rules about how much can be
contributed (and when) have also
changed, which is useful for those
whose income may be prone to
fluctuate. The annual contribution
limit is £50,000, but contributors
can now carry forward allowances
for past years, which makes for a
much more flexible process. For
every pound contributed, the
Government will top it up in the
pension by the amount of the
basic rate of tax and will also give
the remaining tax (up to a total
of 50 per cent) back through the
contributor’s tax return.
These more flexible rules do mean
that some care must be taken – once
money is contributed it cannot be
taken back – but a good financial
advisor can offer advice on the
various considerations.
Relatively recent rule changes
have also opened up the opportunity
to allow pension holders to pass
their fund to beneficiaries free of
inheritance tax; so even if you don’t
think you are going to need all your
pension pot to support your lifestyle
in later years, your investment won’t
disappear when you die.
Apart from pension contributions,
another tax-efficient option to
consider is the Individual Savings
Account (ISA). ISAs have been
with us for a while, and while
the annual allowances can look a
little small (they’re currently set at
£10,680) they can also be set up in
a spouse’s name and, if contributed
to annually, can soon mount up
to a considerable sum. The growth
in the value of investments within
an ISA is free from tax, as long as
funds stay in the account. Unlike
pensions, money can be withdrawn
from an ISA at any time (but the
money cannot then be returned, so
ISAs tend to be used for longer-term
savings).
So far, this is good solid stuff.
For the more adventurous, however,
there are further opportunities in
the form of tax breaks designed
to encourage investors to back
smaller companies. The risk is
obviously that these businesses will
fail to flourish, but the tax breaks
offered significantly reduce the
risks and there are some investment
options that are carefully designed
The run up
to the end of every tax
year sees tax accountants and financial
planners feverishly try to persuade
their clients to ‘spring clean’ their
finances. We tend to think of this as a
financial ‘transfer window’; once the
tax year is over you want to make sure
that everything is in order, because
opportunities might be lost if action
isn’t taken in time.
Certainly the top income tax rate
of 50 per cent should be enough on
its own to make most high earners
consider their personal circumstances
and any unused opportunities
they have to make the most of the
opportunities that Her Majesty’s
Revenue and Customs offer.
Added to that, interest on most
savings accounts is at almost an all-
time low which means taking a tax
efficient approach to finance is all the
more important. If returns are low, do
you really want to give away 50 per
cent of those returns to the tax man if
you can avoid doing so?
There are several ways to set this
spring clean in motion. The following
are just a few of the options available.
The most obvious is to take
advantage of the ‘free money’ which
the Government offers through
pension contributions. The very word
‘pension’ can make grown men and
women bury their heads in their
hands, but when the Government is
prepared to offer up to 50 per cent tax
Philip Smith, head of wealth advisory for Barclays Wealth
offers some thoughts on tax planning for the period
running up to the April 5th tax year end... the financial
world’s very own ‘transfer deadline day’
financial
insights
“Take
advantage
of the ‘free
money’
offered by
pensions”
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