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Bonuses Likely To Be Invested In Pensions

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FT this morning-city folk likely to bulk up their pensions with "record lump sum contributions" using the new A day provisions, not pump them straight into bubble housing... :)

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FT this morning-city folk likely to bulk up their pensions with "record lump sum contributions" using the new A day provisions, not pump them straight into bubble housing... :)


Bonuses likely to be invested in pensions

By Robert Budden, Personal Finance Editor

Published: April 6 2006 03:00 | Last updated: April 6 2006 03:00

Experts expect record lump sum contributions to be invested in pensions this tax year as employers channel City bonuses into their employees' pensions and highly paid staff make use of the more generous A-day rules to increase sharply the amounts they set aside to fund their retirement.

Under the A-day regime, which comes into effect today, investors will be able to make lump sum investments into their pensions of up to £215,000. This is far higher than the old pension regulations, which restricted contributions to a small percentage of individuals' annual earnings.

Financial advisers and pension companies report strong interest from wealthy clients keen to make use of the new freedoms to fund their pension over much shorter periods.

Robert Reid, a chartered financial planner with Syndaxi Financial Planning, a London firm of financial advisers, says some of his clients are preparing to pay the maximum allowable limits into their pensions.

"For the average individual, there won't be big annual lump sums going into pensions. But for high earners it will become an annual ritual. I have three or four clients who will pay the full £215,000 limit into their pension this year. I think we'll see the level of contributions increase and the frequency of contributions decrease."

Some experts are also predicting investment banks as well as law and accountancy firms will pay City bonuses straight into pensions.

"I think we are going to find employer contributions going up significantly," said Andy Bell of AJ Bell, a provider of Sipps, pensions vehicles with wide investment freedoms. "The City traders . . . will go to their employers and ask for them to pay bonuses as pension contributions. There will be lots of people doing it as the member is not taxed on it and the employer gets [national insurance] tax relief paying bonuses in this way.

"It depends whether they are going after the manor house or the Ferrari," said Nick Fletcher, managing director of Saunderson House, a firm of financial advisers based in the City. "But those who are sensible should focus their mind on [receiving bonuses] via a pension contribution. It's a good way to get free money if your employer is willing to play ball."

Investment banks and accountancy firms refused to reveal whether they were considering paying next year's bonuses into pensions. But one bank executive indicated the new rules were likely to attract significant interest. Insurers also said the new regime was likely to lead to bigger lump sum investments as wealthier investors made use of the new freedoms to accelerate their retirement funding.

"The vast majority of consumers will not be affected immediately," said Iain Oliver, head of pensions at Norwich Union. "But this time next year we will expect more single premiums coming into the market place as contribution limits will be more generous."

Hyman Wolanski, head of pensions at Alliance Trust Savings, which manages 10,000 Sipp accounts, predicts most of its investors will also look to set up "family" Sipps so that pension assets can be passed on to beneficiaries at death.

Under the new rules, investors in Sipps will be able to nominate sleeping members who will inherit their pension fund assets when they die. Under the old regime, investors had to buy an annuity with their pension by age 75, requiring them to hand over all their pension money to an insurance company.

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  • 301 Brexit, House prices and Summer 2020

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