At this time of year, many re-aders will be reviewing their tax and financial planning to capitalise on potentially valuable tax breaks. If you miss the deadline, you will almost certainly lose out, both in the short and long term. And luckily for partners, they can be uniquely well placed to maximise available tax breaks.
During the past few years there has been a gradual erosion of the advantages of pension saving. But pension funding is just one part of financial planning for retirement. This highlights the need for a thorough and prompt look at individual finances.
There has been a catalogue of changes to pensions: personal pension contributions have been capped; changes in the taxation of dividends have reduced the effectiveness of equity investment within a pension scheme; carry-forward relief has been lost; and annuity rates have fallen. Publicity relating to Equitable Life and guaranteed annuity rates has made many wary of funding their retirement solely via a pension scheme.
The bad news continues. The Government recently announced that it will not yet remove the obligation to purchase an annuity with pension fund monies by the age of 75. There is likely to be greater freedom of choice between annuity providers and this should make the annuity market more competitive. However, these providers will not have to compete with other investment products on the open market. Amazingly this is happening just when the Government should be encouraging us to save for our own retirement to reduce the burden on future taxpayers.
One of my colleagues defines middle age as “just after the moment you realise the importance of the pension contributions you have been paying and just before you realise that you have not been paying enough”. It's true that investing regularly in a pension scheme early in one's career can create a sizeable retirement fund, but take care to ensure that funds are wisely invested for long-term growth. Too often, people concentrate on their level of pension contribution and ignore investment performance, which can have a far greater impact upon the amount available in later life. Not surprisingly, there is a growing interest in self-invested personal pensions which give investors more control over their pension plans.
The introduction of stakeholder pensions has also created the opportunity for a pension scheme to be established for a non-working spouse, providing another tax efficient opportunity to create a pension fund for a couple upon retirement.
So how else, besides pensions, can you fund retirement? Firstly, think about investing through some form of individual savings account (ISA), although these are subject to certain caps depending on the type of ISA chosen. ISA investments can be made in equities, cash deposits, and can also be linked to certain types of insurance products. Such schemes are interesting, as the investments while within the ISA generally accrue income tax-free and are not liable to capital gains tax (CGT), thereby improving the yield. There is also the added advantage that, unlike pension schemes, the fund can be drawn upon in cases of financial emergency.
Other tax-favoured investments include enterprise investment schemes, venture capital trusts and film partnerships. These are invariably higher risk investments where the tax system is used to encourage taxpayers to invest. While some of these schemes can be highly successful, many do not achieve a real return on the investment. There are hidden dangers with film partnerships – the Inland Revenue recently won a case in which companies under the control of any partner were treated as 'associated' with a company of another partner. This can result in an increase in the corporation tax rate applicable for such companies, despite none of the investors having knowledge of the others', albeit passive, involvement.
Finally, don't forget the use of funds to repay a mortgage or other non-tax relievable loan. While the interest rates on mortgages are at an all-time low, remember that repaying part of a mortgage with an interest rate of say, 5.75 per cent, results in an effective gross yield of 9.58 per cent. Given current interest rates you will be very hard pushed to achieve such a return on funds deposited elsewhere. But a word of warning – find out about any penalties that may arise on early repayment.