Your Money Magazine :  April 2006 - A Renaissance for Pensions

Now that the experts have finished reading the small print in Gordon Brown's latest Budget, it seems to be clear that he has done little to alleviate the tax burden on small businesses. After all, businesses don't get a vote, whereas pensioners and first time buyers do, so that is where his favours have been concentrated this year.

The majority of commentators do however feel that, should Labour return to power, then next year's Budget will be far more draconian, as it seems clear that there is a fairly large deficit in the Government's spending plans.

So how, as a small business owner can you seek to recoup some of the tax that the Government removes from your hard earned profits?

To tell the truth there are a number of ways of reducing business taxation, but today I want to concentrate on the new legislation for pensions which comes into effect on 5 April 2006.

I am sure you have been reading a lot about this in the press, but, as always, much of what has been printed is perhaps stretching the truth a little bit.

The basic point of the new legislation is to make pensions much more attractive than they are at the moment. The Government is terrified (and rightly so) that in years to come, it will have to dig deeper and deeper into its coffers to support the retired population which will be growing disproportionately to the working population.

Over the last few years, pension schemes have had a very bad press as fund values fell during the stock market crash, and people started to turn to other forms of investment as a way to fund their retirement. Buy-to-let property purchases are now much more common than they were, for example.

The problem is that it is not the pension schemes that have caused the problems, it is the markets. Pensions are still the most tax efficient way to save for retirement, and now that markets are recovering, in time they may become the journalists' 'flavour of the month' as they were in the 1980s.

The Government has therefore sought to make these tax reliefs even greater and, has removed some of the more restrictive legislation governing pensions. For example, you will be able to buy almost any asset class you like with your pension fund, and this would include anything from residential property, here and abroad, down to wine, antiques, vintage cars, etc.

When you come to retire, you will no longer have to buy an annuity, even at age 75, and it will be possible to pass your funds on to your family via a mechanism of connected personal pension plans.

The Government has also raised the limits on the allowable contributions into pension schemes to 100% of salary or £215,000 as a maximum in the first tax year.

This will make pensions one of the first ports of call for any investor.

Why buy a buy-to-let property outside of a pension scheme when you can get 40% tax relief if you buy it within the scheme? Why hold funds outside of a pension scheme in stocks and shares, unit trusts or other investments, which on your death could suffer Inheritance Tax. Buy them through your pension scheme and have them passed down through your family using the connected pensions mechanism. In the meantime, you can trade the portfolio without having to worry about Capital Gains Tax or Income Tax!

The new régime will allow people to invest tax efficiently and create family wealth which can survive many generations.

There are a number of very interesting techniques which we are currently exploring to increase tax exemptions and improve returns, including one mechanism whereby a combination of Venture Capital Trusts and Self-Invested Personal Pensions can provide tax based investment 'uplift' of 400%! (ie for £4,000 invested, you can obtain a £20,000 fund.)

There are, however, some pitfalls which haven't been emphasised in the papers. There will be tax charges if you, for example, buy a house with your pension and then live in it. There will be tax charges if you buy a boat and use it. Any investment in a depreciating asset could also give rise to a tax charge.

It is very important therefore that everyone takes time to review their pensions situation now and sits down with an expert who can tell them how the new laws will work, and how they can take advantage of the current pension régimes prior to the new rules coming into effect.

There are one or two types of pension scheme which would provide very high levels of tax free cash to an individual which would be available after their 50th birthday from April 2006.

One or two clients have recently made sizeable investments from profits into Executive Pension Schemes, under current pension law, which they will be able to withdraw tax free in the summer next year.

Obviously the detail of how these techniques and mechanisms work is far too long-winded to explain here, but well qualified independent financial advisers, such as Charlwood Leigh, will be able to explain everything to you.

Pensions will, once again, be the best investment that you can make for the reasons that I have outlined above, and it is important that this year you take time to review your current pension situation so that your funds are properly positioned to take advantage of the change of law in April next year.

For further advice and information and a free consultation, please contact us .