Money: Readers' Lives - Stop work, not your pension

Paying into a pension while not earning ... business bank accounts

I AM 33 and have been paying into a personal pension plan for six years. There is a possibility that I will be offered voluntary redundancy. I'll probably take it: I will receive quite a good pay-off and I am confident that I will be able to find another job fairly easily. However, I am thinking of taking an extended break for a year or two to see a bit of the world. If I do this, could I continue to pay into the pension plan? NS, Essex

You may be able to continue the payments. Normally, to be eligible to pay into a personal pension plan (and therefore get tax relief on those payments) you must have earned income and be paying tax on that income. You have to set your payments against your "net relevant earnings". In the main, this means pay from a job or profits from being self-employed. It does not include income from savings or investments, nor the part of your pay-off that comes tax-free.

What may come to your rescue, however, are rules that allow you to make use of tax relief limits from previous tax years which you have not used. These may enable you to continue paying into your pension plan while you are on your grand world tour rather than working.

There is an annual limit on the amount of money you can pay into a pension plan. Up to the age of 35 it is 17.5 per cent of your net relevant earnings. From the ages of 36 to 45 it is 20 per cent. The limit rises in stages as you get older to a maximum of 40 per cent. (There is, incidentally, also a limit on the overall earnings that can be taken into account. At present it is pounds 84,000.)

In practice, few people make the maximum contributions. Most people, especially at your age, will have unused tax allowances. You can take advantage of unused tax relief going back six tax years before the tax year in which the pension contributions are made. So, for example, you could go back to the 1991-92 tax year for contributions made in the current 1997-98 tax year. If you think you can benefit from these rules, you should consult your pensions company for guidance. Your tax office may also be able to help. Get a copy of Inland Revenue leaflet IR78 for a detailed explanation.

A year or so ago I gave up my job to become a freelance consultant. I prepared the ground carefully before taking the plunge. I followed the advice in various books on self-employment, including opening a separate business bank account. But the bank charges on the account seem to be a waste of money at 63p for each entry on the statement plus pounds 2.50 a month. Is this really necessary? Why should I have to pay a charge for banking a few cheques when, as an employee, there was no charge for my monthly salary credit?

D Richmond, Yorkshire

Most small business guides do recommend opening a business account. Keeping all business banking separate from personal banking can help, especially when it comes to working out your income and expenditure for your tax return.

But whether a separate business account is really necessary depends on the nature and number of your business transactions. Is your number of items of business expenditure fairly low and easy to keep track of? Are your payments for completed work relatively few? Do you have many payments from non-business sources that need to go into a bank account? Are you ever likely to want business advice or a business overdraft or loan? If payments in and out of your account are reasonably straightforward and few in number, and if you don't need a small business "relationship" with your bank manager, you could just stick to the one account you use for your own personal banking.

Strictly speaking, many banks insist that if you work for yourself you are in business and should have a separate business account. In practice, it may be a long time, if ever, before your bank queries the comings and goings on your personal account and suggests you open a business account. At that stage you may be able to persuade your bank that you are a valued customer and that the amount of activity on your account is not normally high. You may be allowed to keep just your personal account, which is almost certainly cheaper.

But many self-employed people do want a separate business account. If this applies you, you may well find that you can get a cheaper deal than you have at the moment. A good starting point would be to get a free copy of Business MoneyFacts. This monthly bulletin has a section on business current accounts. It is also packed with other financial information which might be of benefit to your business. Call 01692 500665.

Alternatively, you will find that some building societies and former building societies will allow you to operate your business through their standard personal current account. You won't have to pay extra charges for your business-related transactions.

Does the imminent demise of PEPs mean that it is not worth putting any more money into them? LP, Sussex

There would appear to be nothing to lose by putting more money into PEPs. As long as PEPs last - until their demise in October 1999 - you'll be getting tax-free returns. The new ISA (individual savings account), the tax-free replacement for PEPs and Tessas, is scheduled to kick in six months before in April 1999. There'll be a six-month period during which you'll be able to convert PEP investments into ISA investments. There is an overall proposed limit of pounds 50,000 on the value of ISA investments, but the Government is under pressure to raise this. Many details still have to be thrashed out.

There are reasons for caution, however. Most important are the record highs that the stock market has been hitting. Invest now and you could be investing just before shares take another downturn. Corporate bond PEPs are a safer option. The other point is to beware of PEPs with high exit or initial costs. It is not yet clear how much it will cost to convert PEPs into ISAs (if anything). But investors in PEPs with initial or exit costs face an extra burden on their savings. At worst these costs could more than cancel out any stock market growth over the next 18 months. Think low cost and - barring a stock market crash that makes shares look worthwhile investments again - think corporate bond PEPs. Two companies with funds that might be worth considering are Legal & General and Fidelity.

q Write to Steve Lodge, 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 s.lodge@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.