Andy Pennie, Marketing Director, Santander Private Banking From the media headlines, a visiting Martian might conclude that all economic activity in the UK had ceased with the end of the investment boom and the advent of a recession.
But despite uncertain economic conditions, millions still go about their daily work and keep things moving. And when it comes to pensions for those who are earning, surely ‘business as usual’ must be the only sensible rule. Investment strategies have had to change, however, the low levels of return that are generally available, particularly from investments offering security of capital, make it all the more vital for individuals to maximise their pension contributions in order to support the value of their plans.
It is not simply a case of investors needing to divert resources from other priorities in order to safeguard their pension; With all sectors depressed and volatile, the tax relief available on qualifying contributions means that, for most investors, personal pensions – SIPPs in particular – currently offer the best real return available. With low interest rates on deposits, the 40% uplift provided by pension tax relief for higher rate taxpayers is equivalent to as much as 10 years of superior returns.
This alone should be a good motivator for investors with adequate reserves of liquidity to direct available funds into their pension plans.
My reason for saying that the current environment favours SIPPs in particular over proprietary PPPs, is that the flexibility of SIPP gives investors the freedom both to take quick defensive action and to take advantage of the short-term opportunities which can appear. These may arise either through the markets or as a result of special offers.
In the case of James Hay, for example, over the last year we have been able to launch three structured products designed to provide our SIPP holders with potentially high returns and security of capital. We anticipate that similar offerings will be a regular feature of our business over the next few years. That same flexibility also means that SIPP investors will be better placed than most others to reap the full benefits of renewed market activity in the early stages of economic recovery.
As it is the tax advantages of SIPPs might become a central part of the decision to invest through a SIPP, any changes in tax benefits available will become more significant. So it will be helpful to look at some of the new tax legislation on the horizon, and to consider its implications for investors:
- 6th April ’09 - Increase of £3,040 to the threshold for higher rate income tax. Although it will take some individuals out of the 40% band, it also gives many higher rate tax payers the opportunity to secure a one -off tax relief ‘bonus’ in the current tax year. If their income in 2009/10 is not expected to be more than in 2008/9 then, provided it is paid before 6th April 2009, a contribution that is equal to the higher rate-taxable portion of their income will gain them an extra £608 in relief.
- 2009/10 - Shall see changes to the thresholds for NI Contributions, which will enhance the cost advantages of salary sacrifice for SIPPs and PPPs, delivering a potential combined tax saving of 51% of contributions.
- 2010/11 - We are promised a two-stage reduction in personal allowances for incomes of £100,000 and £140,000. One effect of which will be to create two new tax bands, each with a marginal rate of 60%. This may increase the appeal of SIPP investment to those with marginal earnings, even moreso via salary sacrifice.
- 2011/12 – Possible introduction of a new 45% rate on taxable incomes over £150,000, presenting an increase in the tax relief that high earners can receive on pension contributions. Although, the potential benefit may be restricted by the freezing of the lifetime pension limit from 2010. However, the new rate will also create new tax planning opportunities by making it more attractive to convert potential income into capital gains. Of course, it is possible that the CGT rate will be increased (and pessimists might view that the fiscal strain of current government commitments makes it likely to occur soon), in which case the advantage could be eroded.
- 2011/12 - Potential further increases in NI Contributions.
While these planned tax changes should help to support ongoing SIPP sales and contributions, providers will not have an easy time. In a tough market, concessions must be made to overcome investor apathy.
For example, from 23rd February to 30th April 2009, James Hay will be running a special offer with reduced charges for new SIPPs.
Plus, SIPP providers must also overcome the prevailing public distrust of financial institutions as a whole. James Hay are fortunate to have a considerable advantage, as our parent, Grupo Santander, has a philosophy of adherence to traditional banking principles that have enabled it to weather the financial storm not only intact, but considerably strengthened in relation to the sector as a whole. So, it’s not all doom and gloom.
For more information visit www.jameshaysipp.co.uk
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