As rates on cash and investments fall, investors are boosting the value of their savings by putting more money into their pensions.
A growing number have been taking advantage of tax relief on pension contributions as a way of earning a better return on their investments, according to Killik & Co, the financial advisers.
Popular ways to do this include transferring money from bank accounts and individual savings accounts (Isas) into self-invested personal pensions (Sipps), as well as using employers’ salary sacrifice schemes.
Transferring money into a pension creates an instant boost in the value of savings and investments, as money paid into a pension gets an uplift in the form of tax relief from the government.
Higher rate taxpayers in particular benefit from this, as they receive a boost of 40 per cent on their savings by transferring them to a pension – a rate hard to achieve anywhere else at present.
However, investors should be aware that moving their savings into a pension means the funds are locked up until the age of 50 – and, from April 2010, this age rises to 55. But, at that point, a quarter of the pension pot can be taken out as cash, tax free.
Savvy investors who are aware of the age rules have been transferring money into their pension just before they turn 50, and taking it out as tax- free cash afterwards.
John Lawson, head of pensions policy at Standard Life, says that such transfers are “fairly common”. Standard Life is seeing more transfers into its Sipp, but of smaller amounts of cash.
People are also moving poorly performing with-profits endowments policies into pensions, according to Malcolm Cuthbert at Killik & Co.
He has seen evidence that wealthy people are transferring as much as they possibly can into their Sipp.
The maximum amount that you can pay into your Sipp is your annual income up to a maximum of £235,000 if you are working – and Killik & Co’s richer clients have been putting this full amount into their pension. For people who have already retired and have no income, the allowance falls to £3,600.
But even at these levels, retired people are finding ways to make money on transfers, according to Lawson. They are putting £2,880 of their savings into their pension to have it grossed up to the maximum contribution of £3,600. They can then take £900 out as their 25 per cent tax-free cash option.
Employees can also top up their workplace pensions through salary sacrifice arrangements. This does not have to be a company pension: employers can pay salary sacrifice money directly into a Sipp.
Lawson says that salary sacrifice schemes are particularly popular with small business owners, as it enables them to work out a more tax-efficient way of paying employees – for example, through dividends.
John Moret at Suffolk Life says people in share save schemes are able to roll the shares into a Sipp and avoid stamp duty. Such arrangements offer a 90-day period in which to exercise the option and it can be done “in specie”, meaning the shares do not have to be encashed first.
However, transferring savings into a pension comes with other limits.
Investors should be aware that pension income is taxed, whereas Isa income is tax- free. Cuthbert says some people try to engineer their savings so that they are higher rate taxpayers when they contribute to a pension – to get the higher relief – but are basic rate taxpayers when they draw the income.
Some industry figures are also nervous that the government could scrap or limit higher rate tax relief on pensions – so anyone concerned about this should consider acting soon.
Investors also need to decide whether they will transfer investments into a Sipp using an in specie arrangement. The alternative is to encash investments – which could incur taxes or crystallise losses. But in specie transfers can be tricky to manage and Cuthbert says most transfers into Sipps are still cash only.
Francis Moore at European Pensions Management warns that in specie transfers can involve delays depending on the type of asset being transferred – as in the case of commercial property. So anyone hoping to complete transfers before this tax year ends on April 5 should act soon.