Stakeholder Pension Planning

Since April 2001 it has been possible for many people, irrespective of earnings, to pay pension premiums under the stakeholder regime.

Think about the following suggestion for an individual aged at least 50. Such an individual is generally eligible to pay an annual stakeholder premium of £3,600 (gross) and immediately elect to take the pension benefits. The cost of the premium net of basic rate tax relief will be £2,808. If the individual is a higher rate taxpayer, further relief will be due taking the net cost down to £2,160. The maximum tax-free cash of 25% of the fund, ie £900, can then be withdrawn leaving a fund of £2,700 with which to purchase an annuity. Allowing a ten year guarantee to ensure a return of capital, a 50 year old man can currently achieve an annuity rate of just over 6%. This produces an annual gross income of £162. After allowing for tax relief on the original investment this produces a return of 8.5% for a basic rate taxpayer and 12.8% for a higher rate taxpayer. The same exercise can of course be repeated every year until the individual is 75.