Putting cash away for the longest holiday of your life

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The Independent Online
After the excitement of being offered free windfall shares, next comes the hard part: deciding what to do with them. Some people will keep them, others will sell and head for a sun-drenched beach in some exotic corner of the world.

If you haven't decided what to do with your shares and you don't need the money from the shares for anything specific, such as paying off debts, you could sell them and use the proceeds to boost your pension. Saving towards retirement is never easy as there always are other demands on our pockets.

Selling your windfall shares and reinvesting the money in your pension could be an easy and painless way to enhance your provisions for retirement.

If you are in a pension scheme at work, you should talk to your employer first. Those who work in the public sector may be able to "buy" additional years in the pension scheme - in other words to contribute for years which you have not yet worked.

If you are already making the maximum contribution into your employer's main scheme, you may be able to make extra contributions into your employer's additional voluntary contribution (AVC) scheme.

Alternatively you could look to start up an AVC scheme with an outside pension provider. But this may well be more expensive, says Vivienne Starkey, a senior consultant with independent financial advisers Haddock Porter & Partners.

"You should look at what you employer is offering first. The charges on your company pension almost certainly will be lower than with an outside scheme. Often your employer will bear all the costs," she says.

Those with a personal pension could invest the money from their windfall shares in this. You do not have to sell your shares immediately. Instead, you might want to hold on to them for a few months, so as to benefit from any initial mark-up on the shares when they make their debut on the stock market.

Anyone who collected the basic windfall from Alliance & Leicester, a parcel of 250 shares, now has an investment worth around pounds 1,500. Tax relief is provided on pension contributions at your highest rate of tax, so a basic-rate taxpayer who puts pounds 1,500 into her pension fund is really investing pounds 1,948.

If the money was invested by a higher-rate taxpayer, the tax relief would mean that the pounds 1,500 once invested would be equivalent to pounds 2,500. Not only do pension contributions attract tax relief, but the money in your pension fund grows tax-free. You will, however, have to pay some tax on your pension fund when you retire.

You may think that investing your windfall share money will have little effect on your eventual pension pot. But as figures from Equitable Life show, this money can soon grow.

For example, if a 25-year-old basic-rate taxpayer were to invest the pounds 1,500 from her windfall shares in a pension, assuming an annual growth rate of 9 per cent, by age 65 that pounds 1,500 would have grown to pounds 48,700 gross. For a 35-year- old the initial pounds 1,500 would have turned into pounds 21,500, and for a 45-year-old it would have turned into pounds 9,540.

You could, of course, keep your windfall shares until retirement and then cash them in and put the money towards your pension. But you would have to pay tax on any dividends your shares earned, unless you put the shares in a PEP.

By keeping the shares, you also would have all your eggs in one basket, as you would be relying on the performance of only one company, points out Nigel Webb, a senior manager at Equitable Life. "The difference is all to do with risk. The advantage of putting the money in your pension is that you then pool your risk and have a stake in a large portfolio of shares."

You could use the money from your shares to invest in a unit trust or investment trust PEP. This would mean your money was invested in a range of shares and you would have more flexibility as you could sell the shares in your PEP at any time.

While some may see this as an advantage over investing their money in their pension, others prefer to have the discipline of a pension where you cannot touch your investments until you reach retirement.

The other point to consider in the "PEP v pension" debate relates to the amount the taxman contributes to your pension, which is subject to maxima, depending on age. So if you are one of those fortunate enough already to have reached those limits, then the PEP option will be worth considering: first of all as a tax-free top-up, and, secondly, as an investment which you could cash in whenever you want - for example if retiring earlier than planned.

If you are worried about your retirement provisions, then using the proceeds from your windfall shares can make good sense. Usually you will have to sell the shares yourself. There are a number of banks that offer share- dealing services and there also are phone and post share-dealing services with dealing charges starting from pounds 7.50.

A handful of pension providers, including Virgin and Legal & General, are offering a share exchange service to their clients. The company will sell its clients' windfall shares for them and invest the proceeds in their pension plan. Customers usually have to invest all the proceeds in their pension.

Legal & General says this saves people having to pay dealing fees, and they get the middle market price for their shares which is around 1.5 per cent higher than they normally would get. Legal & General says it will accept all windfall shares, including Norwich Union shares, but not Bristol & West shares as these will be preference shares.

Abigail Montrose

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