Better than the Bank or Building Society?

Interest rates are at historical lows and it is getting harder and harder to find Bank or Building Society accounts or ISAs that offer rates of more than 1% p.a. A solution to this could be to save into a personal pension arrangement?

 

Around  fifteen years ago and as part of the government’s then ‘Stakeholder’ Pension legislation, it became possible to save up to £300 gross per month (£3,600 p.a.) into a pension plan, even if you were not earning anything. Up until this time it was necessary to have sufficient ‘UK relevant earnings’ to justify a contribution into a pension. Many people know that 25% of the proceeds of a pension plan are available tax free at the time of claiming benefits, but very few are aware that full basic rate tax relief is granted on all contributions, even if contributing as a non taxpayer!

 

From April 2016 the Personal Allowance (the amount of income that can be received in a tax year tax free) is increasing to £11,000. Depending on an individual’s circumstances, this means that potentially up to £11,000 of pension income could be claimed tax free. Any amount above this figure would be liable to tax at the marginal rate applicable.

 

The following examples are based on contributing £300 gross per month for four years. The first assumes you have no other income in the tax year of the claim and the second assumes that benefits are claimed as a basic rate tax payer:

 

Non taxpayer (no other income)

 

Gross contributions into pension:                                         £14,400

Net contributions (actual amount spent):                             £11,520

 

Amount claimable:                                                                  £14,400*

Profit:                                                                                        £  2,880 (an increase of 25% on the amount spent)

 

* 25% of the fund is tax free (£3,600). The remaining amount of £10,800    would be paid gross of tax, as it is below the Personal Allowance. 

 

Basic rate taxpayer

 

Gross contributions into pension:                                         £14,400

Net contributions (actual amount spent):                             £11,520

 

Amount claimable:                                                                  £12,240*

Profit:                                                                                        £     720 (an increase of 6.25% on the amount spent)

 

* 25% of the fund is tax free (£3,600). The remaining amount of £10,800    would be liable to tax at 20% (£8,640 net). 

 

 

Notes:

You must be under the age of 75 to save into a pension.

Benefits can only be claimed from age 55 onwards

The above examples assume that the deposit rate of return on the investment matches the running cost of the plan.

You could get back more or less than the amounts shown, depending on the actual returns made and the actual costs of the plan. 

 

For more information contact us.