Tax break gives up to 14% annual returns

A new tax break that can offer annual returns of up to 14 per cent is coming up thanks to the move to the new Personal Accounts pension plans, a finance website reveals.

EveryInvestor says by cancelling stakeholder pension plans and switching savings to an ISA ahead of the start of Personal Accounts in 2012, Brits can get a 24 per cent higher return.

"Because Personal Accounts are expected to have annual charges one fifth of the annual 1.5 per cent charged by stakeholder plans, savers would end up with £87,200 in a Personal Account after contributing £100 per month for 30 years, 24 per cent more than the £67,000 accumulated in a stakeholder plan (both assuming a gross annual return of 5.3 per cent)," explained EveryInvestor

"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 per cent.

"Assuming a five per cent 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 per cent on the £115 per month contributions over five years, making it the most attractive tax break ever offered to lower-income savers."

"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," said EveryInvestor editor Chris Gilchrist.

"And for those who haven’t yet begun to put money aside for retirement, it’s a great way to kick-start their savings."

For the full recommendation see www.everyinvestor.co.uk