Pension rules permit investors to invest up to £440,000 in this tax year

Investors using Self-Invested Personal Pensions can make use of a new tax concession to invest up to £440,000 in this tax year, according to Charles Stanley financial planners.

By thinking in terms of HM Revenue & Customs (HMRC) “input periods” rather than tax years, investors can put more than a single year’s allowance into their pension plans. They can add the next tax year’s maximum investable allowance (£225,000 in 2007-08) to this year’s allowance (£215,000) to invest a total of £440,000 before this tax year ends on 5th April.

An “input period” is a term of usually one year in which an investor can put up to the maximum allowance into a pension plan. The input period starts on the date that the investor makes his first payment into the pension and usually ends one year later. However investors can in fact opt to end the input period earlier. If they opt to end the input period before 5th April this year, a new input period starts immediately – and they can therefore invest the next year’s maximum allowance straight away.

An extreme example might be:

A pension scheme member pays this year’s maximum entitlement of £215,000 (£167,700 net) into her pension fund on Friday 30th March 2007.

She nominates that the pension input period for this year ends on Monday 2nd April 2007.

The next input period therefore begins on 3rd April. On that day she makes a second contribution of up to £225,000 (£175,500 net).

She has therefore invested £440,000 gross into her pension fund in this financial year. Provided she has earnings in excess of £440,000, tax relief should be obtained on the full amount.

Robert Gofton-Salmond, Head of Financial Planning at Charles Stanley, cautions however that this should only be considered in exceptional cases.

“We would always advise that investors should seek professional advice before making significant investment decision. It is absolutely crucial here. The new pension rules which came into force on A-Day last year do certainly permit you to invest up to £440,000 in this tax year, but that does not necessarily make it a good idea. If you want to safeguard a windfall it may indeed be appropriate, but of course you are locking away that money until your retirement. And you are investing almost one-third of your lifetime allowance – currently £1.5 million. Young people who will benefit from the compounded effect of their investments over the years might well reach the lifetime threshold before they retire.”