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A CONSUMER&#39s VIEW

The collapse in share prices after the horror of September 11 has deprived many who are saving for retirement of as much as 35 per cent of their pension fund. For those with only a few years to go to retirement, this is a disaster. Time is not on their side.

But all is not lost. There are huge tax concessions on pension savings and there is an opportunity to gear up, at very low borrowing costs, which would allow many of these unfortunate investors to recoup the situation.

The combination of a collapse in share prices and low interest rates has produced a situation where many clients will be looking at the possibility of borrowing money in order to take advantage of the last opportunity to use the carryback legislation to soak up unused pension tax relief from the past six years. The deadline is January 31, 2002.

In recent years, pension fund investment has taken something of a bashing due to low annuity rates, low investment returns and the Government&#39s refusal to remove the requirement to purchase an annuity by age 75.

But with the removal of carryback now imminent, borrowing charges historically low and share prices looking very much more attractive, investors may be interested in taking advantage of this one-off opportunity

As always, investors have to ask themselves whether they can invest the money and produce a return in excess of the cost of borrowing. In recent years, the answer has been only a guarded maybe. But the combination of a collapse in share prices and the continuing fall in the cost of borrowing has transformed the situation.

With five-year fixedand capped-rate mortgages on offer at under 6 per cent, it should not be too difficult to produce an investment return of 6 per cent a year or more in a gross fund.

Wiping out a 40 per cent income tax liability on taxable income of £100,000, by borrowing the £100,000 to invest in a pension, will cost just £500 a month. In effect, the investor is paying their £40,000 tax bill over the next six or seven years but is also getting a £100,000 investment with every chance of capital appreciation.

Someone who is currently only a few years off retirement, with an existing pension fund of, say, £200,000, could borrow £100,000 and put it in their pension fund, secure in the knowledge that at retirement they can repay the borrowing with the 33 per cent tax-free cash which can be taken from the old S226 contracts at retirement.

Successful investment depends on where you start. This strategy would look much less appealing if the FTSE 100 index were hovering around its all-time high of 6,630. But with share prices struggling at 5,000, there is plenty of scope for investors to be optimistic – certainly over a sixor sevenyear timescale.

The big unquantifiable risk is whether the Government is prepared to listen to the arguments in favour of removing the age 75 requirement to purchase an annuity. The prospect of low annuity returns for the foreseeable future has acted as a huge deterrent to pension fund investment in recent years.

The Treasury is believed to be quite happy for this disincentive to remain. According to the Retirement Income Reform Campaign, the Treasury is nervous about the loss of revenue which might occur if the annuity purchase requirement were abolished.

Ministers are concerned that the removal of this restriction would make pension savings very much more attractive to wealthier individuals and would, therefore, result in huge losses of income tax revenue as higher-rate taxpayers made the most of pension fund tax shelters.

This is ridiculous. It would be a simple matter to restrict the amount of 40 per cent tax relief on pension contributions or to remove it altogether. This would come as no surprise since the move was widely expected at the last Budget.

The meeting planned between Treasury economic secretary Ruth Kelly and Dr Oonagh McDonald and Sir Nicholas Goodison of the Retirement Income Reform Campaign has been postponed until October 17.

A signal from the Treasury that it might consider reform of the age 75 restriction is all that is required to convince many potential pension investors from gearing up and making the most of their unused pension contribution tax relief .

For many, this will be the only possible way of ensuring that they retire on the sort of income they had expected.

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