Archives >

Winter 2003 Bulletin

TAX & FINANCE TIPS

The season of goodwill is upon us, when uncles are expected to give their nephews and nieces half-a-crown each and grandparents should be good for ten bob at least. Children will, of course, be encouraged to save some of this largesse and our first tip is that they should have two savings accounts: one for money donated by their parents and another for gifts from other relatives. This is because the interest from money donated by their parents can be taxed as the parents’ income, while interest from other money will be taxed as the children’s own income. As it will usually be less than the tax threshold, this means that in practice it will not be taxed at all.

Annuity purchase at retirement

Turning to the grandparents themselves, at retirement the pension fund accumulated within a personal pension scheme is converted into a pension by buying an annuity. The Government has recently sponsored a publicity campaign to remind pension plan holders that they have an ‘open market option’ – the right to buy their annuity from any authorised financial institution, rather than being tied to the annuity offered by their pension plan manager.

It is certainly true that another institution may offer a better annuity rate. But many pension plan managers pay a higher terminal bonus (on the pension fund itself) to plan holders who choose to buy their annuity from the manager, rather than exercise their ‘open market option’. The enhanced bonus can often outweigh the advantage of another institution’s higher annuity rate, so it is important to have all the information before you make a decision. And staying with pensions, there are .....

Problems with pension mortgages

The problems with under performing endowment mortgages are well-known and many homebuyers have received letters warning them that their policies are no longer expected to produce enough to repay their mortgages. There is a parallel, but hidden, problem with pension mortgages – where the mortgage is to be repaid out of the retirement lump sum payable under a personal pension scheme.

Pension plans are invested in the same underlying assets as endowment policies and so are suffering a similar level of underperformance. However, because pension plans are not formally mortgaged in the way that endowment policies are, the life assurance company or other pension plan manager is not required to issue warning letters. Accordingly, it would be sensible for anyone with a pension mortgage to obtain an up-to-date estimate of his retirement lump sum from his pension plan manager.

Do you know TESSA?

It has not been possible to open a new TESSA (Tax Exempt Special Savings Account) since 5 April 1999, but existing accounts are allowed to complete their five-year term. On maturity, the investor has six months to transfer his capital to a ‘TESSA-only ISA’ (Individual Savings Account), so that his savings can continue to earn tax-free interest.

The TESSA provider (a bank or building society) usually suggests reinvestment in its own TESSA-only ISA but it is worth remembering that the investor is entitled to transfer his savings to another institution, if he can find a better rate of interest.