Say goodbye to stakeholder to boost Personal Account pension

EveryInvestor has found a tax break that works for shoppers at Tesco rather than Fortnum & Mason and advises savers to take advantage of Gordon Brown’s generosity to earn a net annual return of over 14%.

Many people saving in stakeholder pension plans should cancel them and switch their savings to an ISA in preparation for the advent of Personal Accounts in 2012, says EveryInvestor. Because Personal Accounts are expected to have annual charges one-fifth of the annual 1.5% charged by stakeholder plans, savers would end up with £87,200 in a Personal Account after contributing £100 per month for 30 years, 24% more than the £67,000 accumulated in a stakeholder plan (both assuming a gross annual return of 5.3%).

The government has proposed a maximum permitted contribution to Personal Accounts in the first year of the scheme of £10,000. So the best strategy for savers who are not eligible for occupational pension scheme membership now is to contribute £115 per month to an ISA investing in the Fidelity Moneybuilder UK Index fund, which has a Total Expense Ratio of just 0.3%. Assuming a 5% net annual return, this plan will accumulate £7,800 by 2012, which can then be cashed in and invested as a net contribution to a Personal Account, attracting £2,200 of tax relief and bringing the starting fund value up to £10,000.

This scheme could provide a net annual return of over 14% on the £115 per month contributions over 5 years, making it the most attractive tax break ever offered to lower-income savers.

Says EveryInvestor’s editor-in-chief Chris Gilchrist: “Tax breaks almost always benefit the rich, but this one offers millions of lower-income savers a far higher return than they are likely to achieve in any other way. And for those who haven’t yet begun to put money aside for retirement, it’s a great way to kick-start their savings.”