Year-end could affect pensions

TAX PLANNING

LONG-TERM pension planning is vital, and the tax year deadline of 5 April really can make a difference.

Anyone in a company pension scheme can put up to 15 per cent of their pay into the scheme and receive tax relief on contributions at their highest rate. But most schemes require contributions way below this level, and some require no contribution at all from the employees.

It is possible, though, to make additional voluntary contributions either to a scheme that is run by the employer or to a free-standing scheme run by an insurance company.

Additional contributions may be especially worthwhile for people in their forties or fifties who are facing the prospect of a small pension. But younger people may also want to top up their future pension entitlement.

The 15 per cent rule applies to each tax year. Any unused relief cannot be carried forward to a future tax year.

The rules are more generous for personal pensions, which are available for the self-employed and others who have not joined a company scheme. Maximum tax relief starts at 17.6 per cent up to the age of 35 and rises in stages to 40 per cent for those aged 60 to 74.

Since unused tax relief can be carried forward for up to six years, the end of the tax year is not such a pressing deadline. But it could make a difference to someone who has made little pension provision and who now wants to invest a lump sum in a pension plan.

Investing in a pension by 5 April allows people to use up relief going back to the 1988/9 tax year. This could be useful even for someone on the verge of retirement, if the money goes into a deposit-based plan (rather than one that invests in shares).

For example, a 25 per cent taxpayer who invests £10,000 will have that immediately boosted to £13,333 once tax relief has been reclaimed. But the person must be happy to use at least 75 per cent of the fund's final value to buy an annuity - only 25 per cent can be withdrawn as a lump sum.