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Earn from non-earners

The October deadline thrust stakeholder into the spotlight again for IFAs. However, as the dust starts to settle for the group market, thoughts will inevitably turn to other avenues to develop and stakeholder provides some interesting opportunities, particularly in the individual pension market.

One Government “target” group that can offer a rich seam of business is non-earners. The Govern-ment&#39s original intention was to allow a much wider group of individuals to save for a pension. This ambition was realised in April when the tax regime chan-ges enabled non-earners to contribute to pensions. A further dimension is the fact that someone else can contribute to the pension on behalf of the non-earner.

This would allow these people the well known benefits of saving for retirement which were previously denied to them – the security of having your own income once you have retired, access to one of the most tax-efficient ways of saving with its tax relief on contributions and so on.

The type of people that the Government is targeting is, for example, full-time carers, people taking a break from work, partners who are not working and even children. For example it enables a 28-year-old woman who is leaving work to have a baby to contribute to her own pension plan. She can make contributions from sources other than earned income or her partner can agree to make contributions on her behalf.

Let us say she was earning £22,000 and had not had higher earnings in any previous year. Her partner could pay further contributions to her pension plan based on her £22,000 earnings for the tax year when she stops working and for the next five (provided she does not return to work). Her partner could therefore pay up to £250 a month net of basic rate tax relief (£321 gross – 17.5 per cent of £22,000).

If she had not returned to work by the end of the fifth tax year after she stops work, the maximum contributions her partner can make on her behalf will reduce to £234 a month net of basic rate tax relief (equivalent to the £3,600 limit a year). Contributions can continue at this level until she decides to take advantage of her pension fund – any time between the ages of 50 and 75.

If she returns to work at a later stage and she wants to revert back to paying her own contributions, the amount she can pay on an annual basis will not necessarily be limited to the £3,600 figure but can be based on her net earnings in a basis year. Alternatively, if she decided to become a full-time mother her partner would still be able to contribute to a personal pension or stakeholder pension on her behalf up to the £3,600 limit each year. She would then be entitled to the same benefits between the ages of 50 and 75.

There are many ways that an IFA can profitably access these target groups. Existing client banks can provide fertile ground for approaching non-earners to advise them of the opportunities and benefits now available.

An alternative approach would be to establish links with some carers&#39 help network or association to inform the network&#39s members of the opportunities now available to them. Not forgetting that professional connections will also be a valuable source of potential customers.

Another market segment who can benefit from the new rules are high-net-worth individuals. For example, it is possible to contribute to a pension for a non-working partner or spouse, up to the limit of £3,600 per year. The contribution is paid net of basic rate tax so the gross amount of £3,600 cost £2,808.

It can also benefit those clients who are close to paying higher-rate tax in retirement. Contributing to a partner&#39s pension instead of their own may maintain the household income while reducing the tax bill. Stakeholder and personal pensions can also be used to absorb the annual inheritance tax gift exemption of £3,000 per donor as an alternative to cash gifts to children or grandchildren.

There is no doubt that there are plenty of opportunities offered by stakeholder post October. By effectively using existing client banks and professional connections it will be possible to sell the stakeholder good news.

So as life after October settles down, it is to time explore all the avenues that the introduction of stakeholder has opened.


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