The opportunities for tax beneficial investing are now few and far between and it is refreshing to discover an investment opportunity, which bucks the trend. Oddly enough, this opportunity arises from the Government’s stakeholder legislation, but those who will primarily benefit are not necessarily the government’s target audience for stakeholder pensions.

In order to explain, we must first of all look at the basic concept of stakeholder pensions. As of April 2001, any individual – apart that is from members of occupational pension schemes with earnings in excess of £30,000 – irrespective of age or earnings, may contribute to stakeholder. The maximum contribution each year is £2,808 net, which entitles the investor to tax relief of £792, resulting in a gross contribution of £3,600 - whether he or she is a taxpayer or not.

This somewhat odd situation arises out of the Government’s wish to ensure that those who are unable to earn, such as carers and homemakers, still have the opportunity to make pension contributions and thereby make provision for retirement income.

Pensions for partners

Consequently, husbands with non-working wives will be well advised to set aside savings of up to £2,808 each year for their wife’s pension contribution. In retirement both parties to the marriage will have a personal tax allowance. If the wife has no pension provision, her personal allowance may remain unused, while all their retirement income is taxed in the husband’s name. Funding a pension for the wife will help to equalise income in retirement, which is a big step towards maximum tax efficiency. It may also avoid the need for selecting a widow’s benefit on the husband’s pension. This could be very advantageous, since providing a widow’s pension uses a large part of the pension fund, which will be wasted should the husband out-live his spouse.

Pensions for Children

Stakeholder legislation presents another tax planning opportunity, which will again benefit those not primarily targeted by the legislation. Individuals looking to shelter capital, tax efficiently, and at the same time make provision for their children would be well advised to consider setting up a Stakeholder pension for a minor child. £3,600 invested for a five-year old child will, assuming growth of 7%, provide a retirement fund of £101,000 when the child is 60. (Yearly payments of £2,808 would produce a fund of £1,730,000.) That child will have good reason to be grateful to the parent or grandparent who invested £2,808 fifty-five years earlier!

Immediate Vesting Stakeholder – Risk free, high yields for life!

We are constantly reminded that annuity yields have fallen in recent years, and this is indeed the case. However, it is worth remembering the principal reason they have fallen is that we are all living much longer and that consequently the annuity income is likely to be drawn for many more years.

But even with yields at today’s reduced levels, the income yield from an Immediate Vesting Stakeholder Pension is extremely attractive, whether the individual is a non-taxpayer, standard or higher rate taxpayer. The following example shows the position for a male aged 70 and illustrates the effective yield for the three classes of taxpayer.

Taxation Status	Gross Contribution	Cost to investor (after Tax Relief and Tax Free Cash Payable of £900)	Gross Income (Annually in Advance)	Net Income(assuming the recipient continues at the tax rate)	Net Yield
Non Taxpayer	£3,600	£1,908	£210.33	£210.33	11.02 %
Standard Rate (22%)	£3,600	£1,908	£210.33	£164.06	8.5 %
Higher Rate(40%)	£3,600	£1,260	£210.33	£126.20 **	10.02 %**

** Net income increases to £164.06 if investor becomes a basic rate tax payer = 13 %

It is worth noting that if our higher rate taxpayer were to make his pension contribution with the benefit of higher rate tax relief, but draw his income as a basic rate taxpayer, the effective yield rises to 13 %. While it would be right to point out that purchasing an annuity means that the capital is “spent”, it is possible to purchase an annuity with a five or ten year guarantee, thus reducing the element of risk in this transaction.

For a male aged 60, the following table illustrates the effective yield for the three classes of taxpayer.

TAXATION STATUS	GROSS CONTRI-BUTION	COST TO INVESTOR (AFTER TAX RELIEF AND TAX FREE CASH PAYABLE OF £900)	GROSS INCOME (ANNUALLY IN ADVANCE)	NET INCOME(assuming the recipient continues at that tax rate)	NET YIELD
Non Taxpayer	£3,600	£1,908	£154.02	£154.02	8.07 %
Standard Rate (22%)	£3,600	£1,908	£154.02	£120.14	6.3 %
Higher Rate(40%)	£3,600	£1,260	£154.02	£92.41**	7.3 %**

** Net income increases to £120.14 if investor becomes a basic rate tax payer = 9.5 %

Illustrations for above figures were received on 19 September 2003.

Conclusion

The Chancellor’s stakeholder provisions have perhaps unwittingly provided a very attractive investment opportunity for many investors outside the scope of his original Stakeholder concept. So long as these opportunities remain, we would urge investors to take full advantage of them. If you would like an illustration, please contact Douglas Brown, Partner at Nunn Hayward.