Pension Planning

Most of us are familiar with the need to save to help provide a satisfactory standard of living in retirement and pension schemes offer very attractive tax concessions to help us do so. There is, for example, no other way of saving money that attracts tax-relief at your highest marginal income tax rate. A higher rate taxpayer therefore achieves an investment of £1,000 for every £600 they contribute to their pension plan with the balance contributed by the Inland Revenue.

However, much of this tax advantage is being wasted because the money is invested in poor performing funds sold by insurance companies – often with high levels of charges designed to pay commission to salesmen.

With the exception of those individuals who are lucky enough to be members of an occupational final salary pension scheme, our income in retirement will depend upon the investment performance of the funds our pension is linked to. Pension schemes are, therefore, simply investment portfolios with tax relief and should be considered in exactly the same way as any other form of investment. Very few investors would be prepared to invest all their capital in a single investment fund and commit to keep it in that same fund for 15, 20, or even 30 years but that is often what happens if that same fund is called a pension.

In recent years the world has changed as, in response to problems with Equitable Life or closed With-profit funds, investors have, quite rightly, become increasingly nervous about committing their capital to a single ‘managed’ fund offered by one insurance company. Even if a fund is performing absolutely brilliantly when an investment is placed many factors can impact on its performance over the length of time normally associated with a pension scheme. It is important to be able to move money between both individual funds and management companies at minimum cost within the tax efficient wrapper offered by a pension provider. A new generation of plans is recognising this requirement by making it possible to spread an actively managed portfolio of funds offered by major independent fund management companies to improve the investment returns, and frequently at lower cost than traditional schemes.

We strongly recommend that anyone investing in any form of personal pension arrangement review their existing arrangement as a relatively small improvement in the annual performance of a pension fund can have a dramatic impact on their income in retirement.