Money: Where saving is once and for all

Single-premium pensions make sense, says Harvey Jones

There is still time in this financial year to get full tax relief on personal pension contributions - even if you haven't yet set up a policy. A pension plan taken out before 5 April allows you to take advantage of this year's unused tax relief and to mop up the allowance from previous years as well.

To get the tax break you have to buy a "single premium" plan. This is a flexible and increasingly popular alternative to a monthly premium pension. These policies have particular advantages for the self-employed, those with irregular income or people who receive an annual bonus, says Andrew Bedford, marketing director of Financial Options Group, a network of independent financial advice firms.

"If you earn pounds 20,000 most years but sometimes earn pounds 50,000, you may wish to pay a one-off extra contribution," he says. "This will allow you to increase your overall pension pot and make sure you are using as much of your available tax relief as possible."

The Inland Revenue allows tax relief on personal pension contributions at your highest tax rate, whether you pay a lump sum or regular premium. If your limit has not been reached, you can contribute up to a set percentage of your net relevant earnings. This limit is 17.5 per cent for people under 35 and rises to a maximum of 40 per cent. If you have the money, you can pay above that and still get tax relief by claiming any unused relief from up to six years ago, providing you do not pay in more than the equivalent of your annual income.

Mr Bedford says: "A problem is that if money is tight one year, you might be tempted to skip a payment. Monthly payments are less hassle and it feels less painful paying pounds 200 a month than pounds 2,400 a year."

On the other hand, Adam Norris, managing director at Hargreaves Lansdown Pensions Direct, says single premium pension plans have the benefit of being cheaper. "The average single premium is around pounds 3,000. This payment is cheaper to administer than a monthly contribution of pounds 50, so you save money," he says.

And unlike many regular premium plans, single premium pensions are not hit by the "front-end loading" of financial advisers' commission (see jargon-busting box). These charges can wipe out huge chunks of your pension contributions in the early years, hitting performance all down the line.

Pension company charges and IFAs' commission (which alone costs between 5 to 8 per cent of your contributions) have drawn much criticism. The commission element can be saved by purchasing your pension through a discount house.

Hargreaves Lansdown rebates 80 per cent of the initial commission paid to IFAs if you buy without advice (on an "execution-only" basis). This discount could put an extra pounds 100 or more into your pension on a lump sum of pounds 1,000, compared to going through a fee-based IFA. TQ Direct Choice offers a similar service.

Hargreaves Lansdown recommends five pensions houses. They are: CGU, Royal & SunAlliance, Scottish Widows, Skandia and Standard Life.

Mark Birks, pensions marketing manager with Royal & SunAlliance, says single premium plans are enjoying a surge in popularity for several reasons. One is the fear that Labour will reduce the tax relief available on premiums for higher rate payers, so people are using up the allowances just in case. The uncertain labour market and growth in short-term contract working has also dissuaded many from making regular pension commitments and only paying in when they know they have the cash.

Discount pensions: Hargreaves Lansdown, 0117-980 9926; TQ Direct Choice, 0800 413186. Providers: CGU, 0500 100200; Royal & Sun Alliance, 0800 300880; Scottish Widows, 0345 697567; Skandia, 01703 334411; Standard Life, 0845 6060100.

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