How many stakeholder pensions are allowed at the same time?

sneekymum

I thought it would be a good idea to suggest my mother (aged 67) saves some tax (as she's in the higher tax bracket) by getting her to put some money in a stakeholder pension. She can apply to have a contribution counted for last year (if she gets this sorted out by January 31st 2006 when after which that won't be allowed).

She's not so keen on pensions as she really doesn't need one and would like to get her money back eventually. From 'A' Day (April 6 2006) she could withdraw all of a fund which is less than £15,000. So, if she contributes £13,000 now (£7,600 in real money) she can save £5,200 in tax and wind up her pension before it grows too big to get back.

So that's last tax year sorted.

What I don't know and daren't ask is can she do the same thing this year with a new company. i.e. have two stakeholder pensions running alongside. And again next year ( though I don't expect anyone to know the answer to that just yet.....). Does anyone know the answer to this? Will we run into trouble with the insurance companies? or the Tax man?

Also, her pension contributions will be less than 40% of her rental income which I am assuming is "Relevant Earnings" - mother's dubious about this and doesn't think of herself as self-employed - she say's that rental income is "Unearned Income" although anyone in the buy-to-let game will dispute that they don't earn it.

isasmurf

The answer to your question is that you can have as many Stakeholder Pensions as you like. What counts is the total amount you put into the pensions, which as you correctly point is 40% of earnings for your mother.

As to whether this is a correct strategy I am not too sure on that. I think I'm correct in saying that 75% of what is commutated will be treated as taxable income, so you're only avoiding tax on part of it.

sneekymum

Mother's income last tax year was of record proportions -

just before the end of the tax year she sold one of her four commercial properties and is in the process of selling a second (thus getting the most from her Capital Gains Tax allowance) and so this year's rent will be much less than last. If she can lose the other two tennants her income will further reduce -

Meanwhile the aim of starting some pensions is to reduce the tax burden now (and for last year) while she's a higher rate payer and if this only means moving it on to later years that'll be OK as she hopes to be well into the 22% band by then.

dunstonh

As already said, you can have as many as you like. However, most decent stakeholders reduce the charges, the higher the fund value so using multiple providers is not always the right thing to do.

In addition, when there is multiple sources, the annuity rate you get when you commence the pension income will be lower than when there is one source.

As a 40% tax payer, the amount of money your mother is putting at risk is quite limited. Only 35% in simple terms she is paying for (40% tax relief and 25% tax free lump sum back). If she picks low risk funds and waits for a few years she should break even to her contribution and then after that see profit.

Ideally, its a case of writing a cheque, wait for around 5-7 years. Mature the pension and take 25% tax free lump sum which will equal or beat your contribution paid in and then get an income for life thereafter. That income can often equate to over 10% p.a. equivalent to what you paid.

Stakeholders can be a very effective investment for those in retirement. I use them quite a lot. Its just a case of making sure the maturity method is suitable for the person.

Those that terminally ill should consider pensions as well. You get tax relief on the contribution and on your death, the fund value is not included in your estate for IHT purposes and the full value is paid to your nominated beneficiary.

oceanblue_3

No - once a pension fund has been vested (or, has started to pay you an income) the only benefits on death are:

1) continuing income to a spouse or dependant, but only if this option was selected at outset;

2) the remainder of any guaranteed income period (5 or 10 years), but only if this option was selected at outset.

In the the term "Guaranteed Annuity Rates", the description "Guaranteed" refers only to the percentage used to convert your fund to an income, not to the duration of the income.

Hope this answers your question.