UK workers neglect to save more tax- efficiently

Don’t miss out on the extra tax relief available this year

Research from, has found that UK workers in company pension schemes are missing out on huge sums by neglecting to save more tax-efficiently.

As a result, higher-rate taxpayers, who are members of their employers’ occupational pension schemes will miss out on an extra £720m available in tax relief this year by failing to make Additional Voluntary Contributions (AVCs).

AVCs run alongside employers’ pension schemes and allow employees to pay extra contributions over and above their standard monthly retirement savings, which could help build up a larger pension pot for retirement.
For the vast majority of people the annual pension savings limit is 100 per cent of salary. However, following ‘A’ Day the rules place an overall lifetime limit on tax-advantaged pension funds of £1.75 million (2009/10). There is a tax charge for values in excess of the limit at retirement, and for excess contributions in a year over the annual limit, which this year is £245,000.

Transitional arrangements protect those who have already reached the ‘lifetime’ savings limit at 5 April 2006, but protection needed to be registered by 5 April 2009.

So technically, if you earned £50,000, you could put away that amount a year into your pension pot, however, people earning over £150,000 my find their permissible pension contributions restricted by the recent Budget announcements.

There are two kinds of AVCs. The first type, added years AVCs, allows you to buy extra years service in your employer’s final salary scheme. So if you agree to pay a set amount you can usually get up to an extra five years service. So instead of retiring with just 20 years service, you can retire with 25 years.

As you are receiving final salary benefits by contributing to these plans, if you have one available, it is probably the most appropriate vehicle for additional pension savings.

One word of caution though because AVCs buy you extra years in the final salary scheme, if your employer gets into financial difficulty you could find yourself falling back onto the Pension Protection Fund for compensation.
The second type of AVC is a money purchase AVC. These allow you to contribute to a pension pot separately from your employer, usually with an insurance company.

Your fund options are usually limited and you might be paying hire costs for these contracts, so since A-Day, in April 2006, when the government overhauled the UK’s pension regime, they have really been replaced by stakeholders, personal pensions and self-invested personal pensions.

Tackling a potential IHT issue

The fall in the value of assets such as shares, buy-to-let properties and holiday homes to their lowest levels in years, combined with a historically low capital gains tax rate, may be prompting more and more taxpayers to give away surplus assets to minimise future inheritance tax (IHT) bills. If you are considering tackling a potential IHT issue, now is a great time to discuss this with us.

This current slump in asset values may present appropriate taxpayers with a rare opportunity to pass on assets while paying substantially reduced capital gains tax (CGT). The reduction in the CGT rate from up to 40 per cent to a flat rate of 18 per cent in April last year may also reduce the potential tax bill on assets gifted away. For lifetime gifts, the value of assets for IHT purposes is determined at the time they are given away, so while valuations are low, it is worth considering the advantages of gifting assets now.

So long as the gift is an outright gift to an individual and the donor survives seven years after making the gift, there will be a significant long-term tax saving. And with the IHT rate at 40 per cent, the long-term tax saving could be very significant. If there is a risk that IHT becomes due on gifts made prior to death, it is important for taxpayers to consider making gifts while asset values are low.

Lifetime gifts use up the nil-rate band first upon death within 7 years. This will affect the allowances and the actual tax paid on the estate. The nil-rate band is the amount up to which an estate will have no IHT to pay and is currently if you are single £325,000 (2009/10), or are married or in a registered civil partnership £650,000 (2009/10).

Inheritance tax glossary… the basics

Assets Generally, everything that you own.
Beneficiary A person, or organisation, to whom you leave a gift in your will.

Estate The total sum of your possessions, including property and money, left at your death once any debts have been paid.

Inheritance tax (IHT) The 40 per cent tax paid on an estate that is over the nil-rate band threshold. The current 2009/10 threshold is £325,000 for an individual. Married couples or those in a civil partnership have a combined threshold of £650,000.

Intestate The term for someone dying without having a Will in place. In this case the Rules of Intestacy will decide to whom your estate is passed.

Nil rate band The amount of your estate on which IHT is not payable. For the tax year 2009/10 this is £325,000, and for married couples or those in a civil partnership £650,000.

Potentially exempt transfer A gift made during one’s lifetime that is exempt from IHT should the donor live for 7 years after making the gift.

Trust An arrangement you can make in your will to administer part of your assets after your death.
Will A form of instruction as to how someone wishes to dispose of their assets on death.

Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.