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Bond to succeed

Perhaps not surprisingly, much of the focus in the pension industry in recent months has been centred on the group market with the implications that emp-loyers faced by October 8.

Providers and IFAs have been directing their attention to employers and the designation of personal pensions for employees. As a result, the individual market has been neglected.

The changes introduced by the new tax regime introduced in April of this year apply not only to group pensions but also to individual pensions.

Previous pension legislation excluded many people from taking out an individual pension. Now almost everyone has the opportunity to have a personal pension in some way or another.

Consumers, however, are not easily excited by the concept of retirement planning. The introduction of yet another pension could add to the confusion.

To convince clients to take control of their retirement provision and take advantage of the latest pension legislation, IFAs should consider the range of options now available to consumers and communicate the benefits in a clear and concise way.

Initially, the Government intended the new tax regime and stakeholder pension to be aimed at the low to middle-earner market. However, there are clear opportunities for middle to higher earners too. There are a number of new angles and a variety of potential markets for IFAs to consider.

Over the next few weeks some of the opportunities for IFAs will be reviewed and the benefits of each discussed. In this first of four articles I look at how bond investors can take advantage of tax-efficient savings by investing in a personal or stakeholder pension.

Bearing in mind that most bond investors tend to be older and may be looking for ways to supplement their current pension provision as they near retirement, the latest pension rules could pose an attractive option.

Bond investors could use all or part of their annual bond withdrawal by investing in a personal or stakeholder pension and gaining from the immediate tax relief.

Individuals can make contributions of up to £3,600 a year without proof of earned income, enabling even bond investors already in retirement to benefit from their annual withdrawal.

Contributions are paid net of basic rate tax. Investing the withdrawal over a period of years will build up a fund that the policyholder can reap the benefits of at a later stage – any time between the ages of 50 and 75.

At this stage, the client has the option to take 25 per cent tax-free cash and the remainder of the fund can be used to buy an annuity or draw income (if under 75).

The more money invested into the pension fund, the greater the benefits. These benefits will be in addition to the return received from the original bond investment.

For example, an individual with a bond investment of £50,000 can take an annual withdrawal of £2,500 and would be eligible to invest all of this as a net contribution into a personal or stakeholder pension. Once basic tax relief had been applied the overall annual contribution into the pension fund would equate to £3,050, well within the £3,600 limit.

If, however, the policyholder was a higher-rate taxpayer he would only have to pay net contributions of £2,160 to give an annual contribution equivalent to the £3,600 limit.

The additional 18 per cent relief would not be applied immediately but could be claimed through the policyholder&#39s self-assessment form.

This would give the client the option each year to invest the remaining sum – £890 – in some other way.

IFAs should be encouraged to re-examine their existing client book, carefully consider each one&#39s circumstances, take key action and add value to their clients&#39 retirement provision.

This is too good an opportunity to bypass. The potential is huge and with the technical expertise and support of providers, IFAs and their clients can ben-efit from an already established bond investment.


Pinnacle Insurance – The Medex Senior Plan

Thursday, November 1, 2001.Type: Healthcare cash plan.Minimum premium: £1.50 a week.Minimum-maximum ages: 18-79.Maximum benefits: £690 a year.Deferred period: Six months.Commission: None.Tel: 020 8731 3625.

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