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You should remember that past performance is not necessarily a guide to the future. Market and currency movements may cause the value of units, and the value derived from them, to fall as well as rise and you may get back less than you invested when you decide to sell your units. The tax treatment of investments and pensions is not guaranteed and may change in the future.

Your home is at risk if you do not keep up the payments on a mortgage

You get 25% of the fund as a tax-free lump sum but you also have to use 75% of the fund to buy an annuity. (The lump sum is now referred to as a pension commencement lump sum (PCLS) which makes me think they will tax it some day)

The bad news is you must also wait (after 2010) until age 55 in order to draw the income, but that is also good news as you will have a pension whether you like it or not, you cannot access your money beforehand, which is bad news is it not?

Compare a pension contribution to an Equity ISA

There is no tax relief on the contribution but no higher rate tax on any income you draw and you can take it any time you like, no waiting until age 55. You also have access to all your funds at all times, which is a great strength but also their greatest weakness as you could get hold of your funds and spend them finishing with no pension!

The following table sets out a simple comparison between pension contributions for a basic rate taxpayer, a higher rate taxpayer and an equity ISA all investing in the same fund. I have not made allowances for charges I am simply trying to demonstrate a point.

Save £1,000 from salary a year gross for ten years at 5% p.a. growth net of all charges etc.

*Assumes Annuity purchased for a male age 60 with a wife aged 56 joint life annuity with 50% widows pension and 3% escalation.
# Net income assumes 4% from PCLS and ISA assumes income of 4% gross of the fund.

So for the same net outlay the basic rate tax-payers could be better off having an ISA rather than a pension and higher rate tax-payers should have a pension provided they are not liable to be 40% taxpayers when retired!

As mentioned earlier the problem with ISA’s is that you could spend the fund, whereas you can’t with a pension fund!

PERSONAL PENSIONS

Continued

Back

	Pension with 20% tax relief	Pension with 40% tax relief	Equity ISA 20% taxpayer	Equity ISA 40% taxpayer
Net Contribution	£ 800 p.a.	£ 600 p.a.	£ 800 p.a.	£ 600 p.a.
Tax Relief	£ 200	£ 400	Nil	Nil
Gross Contribution	£ 1,000	£ 1,000	£ 800	£ 600
Ten year net outlay	£ 8,000	£ 6,000	£ 8000	£ 6,000
Ten year est. value	£ 13,206	£13,206	£ 10,565	£ 7,924
Lump sum (25% or 100%)	£ 3,301	£ 3,301	£ 10,565	£ 7,924
Net annuity*	£ 271	£ 209 (40%)	Nil	Nil
Total Net Income #	£ 403	£ 314 (40%)	£ 422	£ 317
		£ 403 (22%)