by Steve Meredith, Scottish Widow's Senior Financial Planning Manager

Steve Meredith is Scottish Widow's Senior Financial Planning Manager, Pensions frequently writing and commenting on Pension planning issues from an employer, employee or self employed perspective. He has over 35 years industry experience, exclusively pensions based for the past 25 years. He is the manager of the Pensions team and speaks regularly on Pension planning issues.

I would like to thank Steve on behalf of Scottish Widows for sharing this contect with us.

Traditionally Christmas is a time to relax and messages of good will sent out. But it's also a topical time to discuss pension planning with messages regarding the end of the tax year, coupled with the popular company year end of 31 March. With this in mind here are twelve ideas to increase retirement savings.

Many individuals consider investing some of their redundancy payment, especially any amount over the first (tax-free) £30,000. If a redundancy payment greater than £30,000 is received and added to 2009/10 income earned before redundancy, higher rate tax may be paid on a considerable amount. However, earnings for 2010/2011 could be far lower or even nil, in which case the contribution would be limited to £3,600. Those wanting to obtain higher rate tax relief may need to contribute before the end of the tax year.

In the past, it has sometimes been difficult to gain the support of employees for this idea as 'sacrifice' implies that there is something being given up, or lost, and this is not the case. An 'exchange' is taking place, value is not lost, and it's important this is realised.

A reduction in earnings means a reduction in national insurance payments and these savings can be used to provide benefits in a number of ways. If the employee and employer national insurance savings are added, the employer pension contribution could be up to 31% higher than receiving the salary and paying a personal contribution. For higher rate taxpayers who opt for salary exchange, the increase in contribution would be lower (14.7%) but there would be the added benefit of tax relief at source.

There are a few key points to be aware of:

• All registered pension schemes have a 'pension input period'.
• The pension input during a pension input period is compared to the annual allowance for the tax year when the period ends.
• In a money purchase scheme, the member may choose to end the pension input period less than twelve months after the start.

Example - Mary runs her own business. A pension plan commences on 15 March 2010 with a £245,000 employer contribution. Mary nominates to end the input period on 19 March 2010. The contribution is tested against the annual allowance for the tax year in which the input period ends (2009/2010).

Mary's second pension input period starts on 20 March 2010 and on this day her employer contributes £255,000 which is tested against the annual allowance for 2010/2011.

Mary nominates to end this second input period on 6 April 2010 (there must only be one input period end, per arrangement, in each tax year).

The third input period starts on 7 April 2010 and ends on 7 April 2011 (in 2011/2012). Any contribution paid between these dates is tested against the 2011/2012 annual allowance. It is therefore possible for Mary's employer to pay another contribution on 7 April 2010 of £255,000.

This means that £245,000 is paid on 15 March 2010, £255,000 a few days later on 20 March and £255,000 on 7 April - a total of £755,000 of company contributions in a matter of days. (The contributions need to be acceptable by the local inspector as 'wholly and exclusively' for employer tax relief to be given).

Contributions of this level will not necessarily make sense if relevant income is over £150,000, as 'anti-forestalling' will bring a special annual allowance charge and a hefty personal tax bill. However, if relevant income is less than £150,000 in the current and previous two tax years, then the anti-forestalling regulations will not apply. But remember relevant income includes investment income, not just earnings from employment.

Where a company makes pension contributions, valuable corporation tax relief can be secured, even when they are made during a loss making accounting period.

Where pension contributions are allowable as a deduction against corporation tax, any trading loss can be set against profits from the previous year and, following the 2008 pre-Budget report and 2009 Budget announcement, the two years preceding that year. The 'carry back' relief extension means a tax refund can be received earlier.

• Claims are possible for companies making returns for accounting periods between 24 November 2008 and 23 November 2010
• Losses are offset against the preceding year first and the amount able to be carried back to the first preceding year is unlimited
• A maximum of £50,000 of the balance of any unused losses can be carried back to the two earlier years.

Trading losses may also be carried forward to set against future profits. As long as the company paid corporation tax in the previous three accounting periods or will be paying it in subsequent periods, tax relief will be applied to pension contributions provided they are made wholly and exclusively for the purposes of the trade.

Consider reviewing cases where a trading loss has been made between these dates to ensure this valuable planning opportunity doesn't get overlooked.

Personal contributions to pension plans are often paid out of net pay and grossed up by basic rate tax relief. For higher rate taxpayers, the difference between higher and basic rate relief is reclaimable when completing a self assessment tax return.

The difference between higher rate and basic rate can be claimed by completing and returning a self assessment tax return. If members don't do this they may not receive the tax saving that is due.

It's a good idea to remind clients of the cost of delaying pension contributions and the possible effects on future retirement provision.

Example - For illustrative purposes, let's assume a growth rate of 7% each year and an annual management charge of 1% each year.

John has relevant income of £200,000 for 2009/2010. He is aged 50 and intends to take his pension benefits at age 65.

If John paid £20,000 gross in 2009/2010 and 2010/2011, these contributions could be worth £92,260 at age 65. The effective cost would be £22,000 (£20,000 less 40% tax relief plus £20,000 less 50% tax relief).

If payment is deferred until 2011/2012, then using the same assumptions, a contribution of £40,000 could be worth £84,588 at age 65. The cost to John would be £32,000 (£40,000 less 20% tax relief).

John's choice is to pay a total of £22,000 net over 2009/2010 and 2010/2011, or pay nearly £35,000 net in 2011/2012 to achieve the same potential fund value at age 65.

Anti-forestalling introduced a 'relevant income' threshold of £150,000 (and a 'special annual allowance' of £20,000). Anyone with lower relevant income is not affected by the rule changes. But even if this year's income is less than £150,000, it may have been higher in either of the previous two tax years.

Assuming that relevant income for all three years is under £150,000, there are a number of pension planning issues and opportunities:

If 'adjusted net income' is over £100,000, the basic personal allowance will be reduced or removed entirely. £1 of personal allowance will be lost for every £2 of income earned over £100,000. All personal allowance will be lost when earnings approximately equal £112,950 (assuming the current personal allowance) - giving an effective 60% tax rate.

'Adjusted net income' is taxable income reduced by specified deductions (such as trading losses and payments made gross to pension schemes) as well as grossed-up gift aid and pension contributions which have received tax relief at source. Provided an individual's 'adjusted net income' is not over £100,000, they will continue to be entitled to the full amount of the basic personal allowance. Making a personal pension contribution would reduce adjusted net income, which not only reduces the higher rate tax liability, but could also mean retaining the full personal allowance and effective tax relief of up to 60%.

Approved share option plans can be rolled over on maturity into a pension arrangement and deliver a tax relief top-up. It may also be possible to encash other types of assets and securities and invest the proceeds into a pension plan which offers access to a wide range of investments, such as a self invested personal pension.

Basic rate tax relief is added to the contribution (which may help to offset any losses), and the original investment can then be replicated as far as possible in the pension plan.

'Sheltering' investments in a tax favoured wrapper such as a pension plan or ISA can even help to reduce relevant income and avoid the possibility of the anti-forestalling provisions biting.

The final step of calculating 'relevant income' under 'anti-forestalling' deducts gift aid contributions. Potentially, gift aid contributions could reduce 'relevant income' below £150,000 and mean not being affected by 'anti-forestalling'.

A donation, subject to gift aid, can be backdated to a previous year if a nomination is made on the self assessment tax return for that year, i.e. before it is submitted to the HMRC by either the 31 October deadline for a paper return or the 31 January deadline for an online return.

This means that provided the 2008/2009 tax return has not yet been submitted, a claim can still be made by 31 January 2010. HMRC Form P810 Tax Review can be used for those who do not submit a self assessment tax return - the deadline is still 31 January 2010.

While the Government's position on recycling tax-free cash is well known, no similar action has been taken against recycling income.

The 'recycled' income is invested in an uncrystallised pension arrangement, offering additional tax-free cash and improved lump sum death benefits, which are not subject to 35% tax or (normally) inheritance tax.

Providing the income is reinvested immediately, all other things being equal, the total fund invested should remain the same as if no income were taken (tax relief cancelling out income tax). However, higher rate taxpayers must be aware of the tax relief time lag. They will not experience full fund replacement unless they replace the marginal higher rate tax up front from other resources before claiming the relief later.

Income recycling could be particularly useful to those who are 50 or over, but under 55 on 6 April 2010, who want to access their benefits before then, rather than wait up to another five years.

Recycling income into a third party's pension is also a useful estate planning tool. Unlike 'personal' income recycling this option is even possible post-75 and could be useful planning for someone concerned about death while in alternatively secured pension.'