Four-month-old India Woodhams is a star. Her picture has been in lots of newspapers, including this one. She may even go down as a footnote in financial history. Why? Because India, from Ealing in west London, was one of the first – and certainly the youngest person to start a stakeholder pension.
Her grandfather, a high-powered financial adviser incidentally, started paying into a Standard Life stakeholder pension on her account from 6 April.
The arrival of stakeholder pensions this month prompted a flurry of articles about retirement planning for children. But the changes in personal pension rules go way beyond saving for children. And much of the impact is still poorly understood.
Two key developments happened. Firstly, stakeholder pensions were launched.
Cheap, flexible and simple, they are intended as the pension to reach the parts other schemes cannot.
Simultaneously, the Inland Revenue rules on contributions to personal pensions were overhauled. The difference has been to break the link between earnings and pension contributions. Previously, a saver had to have sufficient earned income to pay into a pension. Those with unearned income can now contribute, while those with no income can have money paid in on their behalf. In both cases, contributions will attract basic rate tax relief, even if the saver pays no tax.
This opens pension saving – subsidised by the taxpayer – to children, non-working spouses and those on career breaks.
Payments in are capped at #2,808 a year, which translates to #3,600 once the tax relief has been added. If a saver has had earned income in the previous year (beginning this year), higher payments in may be allowed.
Crucially, this money does not have to be paid into a stakeholder pension.
It could go into a conventional personal pension or a self-invested personal pension (Sipps). Charges would usually have ruled out Sipps for such modest contributions, but a new breed controlled through the net is emerging with competitive fees.
What does it all mean? Parents and grandparents can pass money to children this way, although it will be tied up in the pension until the child is at least 50. This may or may not be seen as a disadvantage by the giver.
More useful will be the ability of high-earning spouses to gift money to a non-earning spouse to pay into a pension, even though the giver has used up their own allowances. Such gifts are a way of claiming back some of the tax the giver has paid, albeit tied up in a pension. Spouses may also see a pension as giving them some financial independence.
The other important rule change is to allow people to pay into a personal and company pension at the same time. Previously, membership of a company pension automatically stopped you paying into a personal pension using the same income.
But now, those in occupational schemes can pay up to the #3,600 a year limit into a personal pension, on top of what they pay into their company scheme.
Paying into a personal pension may also be more appealing to workers than saving through AVCs, which are top-up pensions linked to their company scheme. A personal pension can be taken at any time between 50 and 75, with up to 25% available as tax free cash. But AVCs must be taken at the same time as a company pension and can only provide an enhanced income.
So those who earn #30,000 a year or more, or who are controlling directors, are still barred from having both a personal and company pension. In practice, there may be ways around this.
Tom McPhail, pensions development manager at independent financial adviser Torquil Clark in Wolverhampton, says: ‘If a second income is earned by self-employed means and declared to the Revenue, an individual can make separate pension contributions in respect of that. Only #1 of self-employed income will allow savers to pay up to #3,600 a year into a pension. So a trivial income from odd jobs could well be the key to a big slice of pension.’
McPhail suggests a list of self-employed work, including car washing, gardening or even sperm donation. ‘The key issue is to invoice for the work and to declare it as income,’ he says.
Cheekily, he points out that income tax calculations can be rounded down in your favour. So it may not be necessary to pay tax on a #1 self-employed income!
Personal pensions are not the only savings game in town. Most of the money saved into a pension still has to be used to buy an annuity. Savers are increasingly suspicious of annuities and so consequently of pensions.
Nevertheless, the more relaxed contribution rules provide a host of new savings opportunities.
Steven Womack is a correspondent for Financial Mail on Sunday.
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