Money Matters with Adrian Murphy

Oct 12 2012 by Adrian Murphy, Ayrshire Post

Pensions have been back in the press with the launch of the workplace pension scheme NEST (National Employment Savings Trust).

To be introduced gradually over the next few years with the largest employers first, all employees not already in a pension scheme will be auto-enrolled, with contributions from both the employee and employer.

Time will tell whether this is going to work. I will reserve judgement until we see the statistics on those who have chosen to opt out.

But anything that brings pensions into the headlines again, is fine by me. Pensions are the single most tax efficient savings vehicle available. There are three main tax benefits available: Income tax relief (on pension contributions), investment growth free of income tax and capital gains tax, inheritance tax mitigation (if managed correctly). With this in mind incorporating pensions into your long term savings plan is absolutely essential.

Income tax relief is available at your highest marginal rate (20%, 40% or 50%) on contributions into your plan.

This tax relief lowers the cost of contributing to a pension. For example a contribution of £100 will cost: £80 as a basic rate tax payer, £60 as a higher rate tax payer, £55 as an additional rate tax payer.

These contributions can then grow free of capital gains and income tax with 25% of the total fund available as a tax free lump sum from age 55.

This is a very simple way of looking at pension tax relief but it can be used as more than just a simple savings vehicle.

When combined with other savings vehicles it can be a very powerful tool.

New rules have restricted the maximum contribution to £50,000 per annum (with carry back available for the last 3 years).

However, the introduction of flexible drawdown, allowing you to drawdown the full value of your pension under certain circumstances, and the abolition of compulsory annuitisation at 75, have made pensions more attractive.

I would encourage you to look at your current arrangements and ask yourself: Do I know where my pensions are? Do I know what income I require in retirement? Do I know what how much I need to save?Do I have a clear strategy to achieve this?

If you are unable to answer these questions then I would recommend you speak to your financial planner.

E-mail questions/issues to moneymatters@murphyfinancial.co.uk