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Dough a dear

In the run-up to the end of the tax year, advisers will be concentrating a great deal of time and energy on financial planning. The slogan “use it or lose it” neatly describes the focus of much of their activity.

This year, pensions can get in on the act in a way that has not been possible before. Now is the time for those who can take advantage of the £3,600 annual allowance to do so before they lose out.

It became clear during the consultation stage on stakeholder pensions that there was significant potential to develop what has come to be known as the “nearest and dearest” market.

The principle is very simple. A net contribution of £2,808 is paid by or on behalf of a non-taxpayer. The equivalent of basic-rate tax relief is added to this to provide a gross figure of £3,600 which is invested in a stakeholder or personal pension. If only everything in pensions were this simple. But I digress.

Part of the beauty of this strategy is that it can be used in a variety of ways. Let us look at a few scenarios.

At the risk of being accused of sexism, let me say right now that, in all the scenarios I use in this article, the “nearest and dearest” in question is the wife. Of course, the principle will work equally well the other way round.

In the simplest case, a high-earning husband makes the contribution on behalf of a non-working wife. It may be that he is already making the maximum possible contribution to his own pension or it may be that he is likely to be a higher-rate taxpayer in retirement and it makes tax sense to contribute to a pension for her if she will be a basic-rate taxpayer in retirement.

Let us assume her contract has an annual charge of 1 per cent and achieves growth of 7 per cent a year. If a single premium is paid on behalf of a 30-year-old woman now, the estimated fund when she retires in 30 years will be £27,400, which would provide a pension of £2,050. If this single premium were rep-eated each year until age 60, her fund would grow to £298,000, providing a pension of £22,300.

This scenario can be usefully adapted for women who are on a career break. Let us leave the ladies who lunch and consider a high-flying career woman instead. The young woman in this example is aged 25 and earning £30,000 a year. She is pretty switched on to pensions and takes out a personal pension to which she contributes 10 per cent of her salary each year. In this case, we will assume an annual charge of 1 per cent, growth of 7 per cent and salary increases of 3 per cent.

She takes a five-year career break from age 32 and then returns to work, picking up her pension where she left off. At 60, her fund will have grown to just under £367,500 and her pension would be around £27,500. But if her adviser recommended her to keep up her pension contributions by means of a single premium of £3,600 for each of the five years of her career break, her fund at 60 would be over £448,000 and her pension over £33,500 a year. It might be possible, dependent on earnings, to develop this further by using the earnings&#39 certification rules but the £3,600 principle keeps it simple.

Very often, we consider the single-premium market only in terms of stand-alone pensions. But it can also be considered in terms of concurrency.

One of the most common criticisms of concurrency is that those who earn less than £30,000 a year cannot afford to make concurrent contributions. That may be true if considered on an individual basis but the £3,600 limit does not just work for non-earning wives, it also works for moderate-earning wives. I have seen an example where a £3,600 single premium into a concurrent personal pension was recommended for a teacher whose husband is a senior partner in an accountancy firm. Taken as part of their joint income, the contribution was affordable.

Continuing to develop the theme, there is one other area which is not obvious at first but could be worth consideration. Divorce is often accompanied by a great deal of financial damage to pension planning among other areas. Indeed, it was in response to the problem of wives “losing out” in pension terms when a couple divorce that the recent and not so recent changes were introduced in pension and divorce legislation.

Whether or not there is to be a pension share associated with the divorce, using a single premium to kickstart or supplement the ex-wife&#39s pension planning may make very tax-efficient use of any capital sum that forms part of the settlement.

For me, the beauty of the use it or lose it principle is that it can be put to practical use in so many different ways. You take a simple principle and a bit of lateral thinking and the result is a very useful financial planning tool.

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