26 December 1997


Leaving pension planning to

the last minute is inherently

risky. So take advice, start

early and dont be a burden

to the next generation…..

MAKING proper provision for retirement has seldom been more important, as farm incomes plummet and government support for agriculture dwindles.

"In too many cases the farm is seen as a form of pension," says Julian Lang, director of financial planning at Ipswich-based solicitors, Birketts. "The children who subsequently take over have the additional burden of providing income for their retired parents out of the farm business. Invariably, this is something that the business can ill-afford."

For this reason, retirement provision should be encouraged at an early age, he says. The objective is to give the retired partner a secure form of income in retirement – one which is not dependent on the success of the farm.

So what options are available?

Farmers in partnership or self-employed should consider either personal pension plans (PPPs) or self-invested personal pension plans (SIPPs). But for those operating as a farming company, schemes such as an executive pension plan or small self-administered scheme (SSAS), may be more appropriate.

Deciding how much to contribute depends on:

&#8226 The age at date of contribution.

&#8226 Intended retirement age.

&#8226 Performance of the fund.

&#8226 Expected annuity rates at the time of retirement.

A rule of thumb is that the fund at the time of retirement should be ten times the annual pension required.

For example, if the intention is to retire at 60 and the pension is to pay £10,000 per year, the fund should be worth at least £100,000 on that date.

But there are a number of variables, not least whether "escalation" is required (ie whether the £10,000 is to increase each year), or if there is to be provision for a surviving spouse. "It would be prudent to contribute at least 15% of earnings at an early age – or more at older ages," advises Mr Lang.

As well as saving towards retirement, investments in PPPs or SIPPS carry some additional benefits.

Contributions to these schemes are very tax efficient. All personal contributions currently qualify for tax relief at the individuals highest rate of income tax (currently 23% or 40%).

Self-employed people pay pension contributions "gross" and claim relief by offsetting this amount against the tax liability for the year(s) in question. This offers a reduction in overall tax liability in addition to building up a pension fund.

There is continuing speculation that in the Mar 1998 Budget the Chancellor may limit future relief to the basic rate of tax only. Anyone contemplating an investment into a pension fund (particularly the higher rate taxpayers) are encouraged to take independent financial advice before then.

Permitted contributions to PPPS and SIPPS increase with age. An individual younger than 35 may contribute up to 17.5% of net relevant earnings to secure the vital tax concessions. This percentage increases progressively with age so that someone between 61 and 74 is permitted to invest up to a maximum of 40% of net relevant earnings.

"Having said that, pension provision should be encouraged to start as soon as possible," says Birketts insurance manager, Michael Cracknell. "This allows more time to accumulate a larger pot to fund retirement provision and gives the fund manager a longer time scale in which to invest the money. Hopefully this will generate a larger return."

For the individual wishing to invest more than the permitted percentage of net relevant earnings, there is also the use of carry back/carry forward provisions. These allow unused relief from the previous six years to be claimed.

The retirement dates can be selected between ages 50 and 75 for PPPs and SIPPs. Phased retirement schemes are also available for those with large pension funds who may wish to wind down their working week gradually as they step into retirement.

"Always seek independent financial advise to plan your best route for retirement," says Mr Cracknell. "There are numerous providers of personal pension plans with many factors to consider, such as fund selection, investment performance, plan charges and early retirement penalties.

"These can have a significant effect on the overall retirement scheme. Furthermore the plan should be kept under continuous review, and fixed interest or guaranteed funds become prudent as retirement approaches.

"The effect of the new governments first Budget should not be underestimated. Pension funds can no longer reclaim the tax credit on UK dividends – a significant tax increase which seems to have avoided general criticism. Although pension funds remain tax efficient, net returns from equities, and hence the funds performance, are bound to fall, and individuals will need to make higher contributions simply to maintain the projected fund value."n


&#8226 Step 1 The accumulation of contributions:Providing the funds.

&#8226 Step 2 Taking the benefits:Up to 25% of the value of the PPP or SIPP can be taken as cash, tax free. The balance must be used to fund an annuity.

Julian Lang – the later you leave it, the more you must contribute.

Michael Cracknell – always seek independent advice when pension planning.

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