Personal Finance: Money Q&A - On the tax allowance trail

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The Independent Online
After my father died in July 1994 I think my mother failed to claim the extra tax allowance for widows. How can I check whether she has had all her tax allowance and how would we go about getting a backdated adjustment?

JB, WIRRAL

You can backdate claims for tax allowances by up to six tax years before the present tax year. Claims submitted by the end of the current tax year on 5 April 1999 can go back to the 1992-93 tax year (6 April 1992-5 April 1993). Your mother should write a letter to her tax office asking whether she did receive the allowance and formally claiming the allowance if she did not benefit from it.

The allowance is only available to a widow and can be claimed on top of any married couple's allowance she may also have had during the tax year of her husband's death. There is no equivalent allowance for a married man on the death of his wife.

PEP talk

I have seen arguments recently in your column and elsewhere for increasing an employer's pension by saving through a PEP rather than by making additional contributions to a pension. Is there an argument for avoiding all pension contributions in favour of PEPs?

GM, EDINBURGH

First, employees who are members of company pension schemes have the opportunity to increase pension benefits by making additional voluntary contributions (AVCs). There may be a case for some employees to consider PEPs instead but it is important to stress that others will be better off making AVCs. The pros and cons of PEPs over all types of pensions is a big issue. Conventional wisdom says that anyone who has a chance to join an employer's pension scheme should do so, not least because an employer also contributes. Those who do not join are forgoing part of their pay. Anyone who cannot join a company scheme should start a personal pension. Few financial advisers or commentators stray from conventional wisdom.

But what is a pension? Essentially, it is a way of saving and investing, of squirrelling away assets now to provide an income in the future. The supposed advantage over other forms of saving is tax. You can claim tax relief at your highest rate on pension contributions and invest your money in a fund that is free of all taxes on incomes and capital gains. But tax isn't everything. There is no tax relief on PEP contributions but your money is ring-fenced from other taxes in the same way as a pension fund.

Indeed, PEPs (and their successor, ISAs, due next April) have two tax advantages over pensions. First, for five years from next April, PEPs will be able to reclaim a 10 per cent credit on share dividends. Pension funds can no longer claim any tax credit. Second, you can draw an income from a PEP tax free whereas pensions in payment are taxable. Furthermore, the fall in income tax rates over the past 10 years or so has significantly curtailed the value of tax relief on pension contributions. The tax perks for both pensions and PEPs are constantly changing. Arguably, the further away you are from retirement, the less relevant tax perks are. Future chancellors could make nonsense of your early plans.An argument against pensions is their high costs (commission and so on) and inflexibility in terms of what you put in and when and how you can benefit from your investment. For example, the bulk of the proceeds from a personal pension plan have to be used to buy an annuity. Annuity rates are now low. A collapse of interest rates, along with worldwide economic recession, could see annuity rates fall to what would be catastrophic levels. By contrast, you can do with PEP money what you want when you want.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL and include a phone number, or fax 0171-293 2096, or e-mail i.berwick@independent.co.uk.

Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.

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