Government figures show that they believe the number of people who fall into the higher rate taxpayer category will increase from 31.million in the 2010/11 tax year to 3.7million in the 2011/12 tax year.

They also expect the number of taxpayers who pay the 50% additional rate tax to increase as well, by 12% from 246,000 to 275,000 in the same period.

Sipp provider, A J Bell revealed that their financial advisors are urging customers to invest money through their pensions contributions, as this is one of the best ways of obtaining tax relief for those paying 40 and 50% tax.

Marketing manager, Billy Mackay explained, ‘We’ve already seen a 170% increase in single contributions into our Sippdeal and Sippcentre accounts in the first month of the financial year compared with the same period last year.’

‘With the number of higher and additional rate taxpayers on the increase it is no surprise that many are planning their pension contributions carefully to reduce the tax that they pay. The level of contributions that someone can pay into their pension scheme is limited by the annual allowance,’ he added.

Taxpayers will also benefit from a simpler system from the 6^th April 2012, which will see the annual pensions tax free contribution limit sit at £50,000 for everyone, instead of the current system that sees special annual allowances for certain earners.

Taxpayers will also be able to use up any unused allowance from the last three years, meaning they could save £25,000 for the first three years, and then £125,000 in the fourth year tax free as they are using their unused allowance from the previous three.

The same scheme will work backwards for those who haven’t saved more than £50,000 in the last three years.

‘Allowing pension investors to carry forward three years unused allowances is a positive and popular change as it introduces opportunities to effectively plan and maximise your pension contributions and the tax relief available to you,’ explained Mackay.

Public sector pension schemes should pay less but demand higher pension contributions from workers in future, according to Lord Hutton, author of the interim report into public sector pensions submitted to government this month.

The report highlighted why government-guaranteed final salary pension schemes would soon be obsolete. Figures from the National Audit Office showed that the cost of this particularly generous type of public sector pension scheme has risen by a third over 10 years, leaving government with a ‘funding gap’ between pension contributions and payouts of £4bn today. That funding gap is set to rise to £10bn, according to the ONS.

Furthermore, the Hutton report showed that while civil servants pay an average of just 1.5% of their salary in pension contributions into government pension schemes, other public sector workers pay much more – for instance teachers (6.5% of salary) and NHS workers (up to 8.5%). The Hutton report termed this a ‘compelling reason’ why public sector workers should pay greater pension contributions into their pension scheme.

An added complication is the fact that with increasing longevity, public sector pension schemes have to pay out longer to retired workers. Lord Hutton claimed that public sector workers drawing on their pension scheme from age 60 was no longer sustainable, given that the expected time in retirement for a 60-year-old today is 28 years, compared with just 18 years for a 60-year-old in 1970.

A person saving £500 a month for 25 years can generate a pension pot of £407,000, according to insurer MetLife. However, if the value of that fund falls 20% just 5 years before the saver reaches retirement, they would have to increase their pension contributions by an extra £1,031 to meet the same savings target.

Timing and good financial planning advice is the key. If, for instance, the same 20% drop had occurred during the first 5 year of their pension saving, their monthly contributions would need to rise by only an extra £55.51, according to MetLife.

MetLife recommends unit-linked guarantees as a precaution against drops in the value of pension savings. Unit-linked guarantees provide a guaranteed pension income which cannot fall below a certain level. However,  unit-linked guarantees are products suited only to the cautious investor, and not to those seeking the maximum guaranteed income from their pension savings, or those who have a high tolerance for investment risk.

“We believe there is always a case for unit-linked guarantees for more cautious clients, as without guarantees customers are exposed directly to downturns in the stock market,” said Dominic Grinstead, managing director of MetLife UK.

“If markets continue to recover it makes sense to lock in gains along the way, particularly for clients who are close to retiring and in the vulnerable time zone as they approach retirement.”

This offers you as a business owner the option to create a trading loss in your company by making a contribution to your pension, and then to carry back this loss over the two preceding years, gaining a potential tax repayment.

In the table below*, the company predicts profits of £80,000 in the current business year to end March 2010.

Your company can make a contribution to your pension of £190,000, thus turning the profit of £80,000 into a trading loss for the company of £110,000.

This trading loss can then be carried back and offset against profits of £60,000 last year, and £50,000 the year before. This not only recoups the corporation tax payments of £12,600 and £10,000 that were made in previous years, but avoids the payment of £16,800 in corporation tax that would have been payable on your company’s £80,000 profit this year.

That’s a gain for your company of £39,400!

*Source: Scottish Widows

Decide when you would hope to retire

This is the key first step in retirement planning, especially as we are now living longer than our parents’ generation. The average age of death for males is now 86, which implies that your pension may have to last you 20 years or more. Consider this as a (very) extended end-of-life holiday. It is important not to run out of money!

Work out what ‘buying power’ you want in retirement

The buying power of your pension is a more meaningful calculation than simply aiming for a fixed cash sum or a percentage of earnings. Together with your adviser you can set a target, factor in the likely effects of inflation on your savings from now until you retire, and then work backwards to decide what you need to be pouring into your pension pot today.

Review your pensions contributions once a year

Having made your initial prognosis, you should meet your financial adviser at least once a year to revise your pensions calculations and make sure your ship is on course to achieve those elusive lifestyle goals you set at the beginning. In this, it is wiser to raise your pensions premiums in line with rises in average national earnings, rather than on retail price increases.

Consider a stakeholder pension

If you can afford only small premiums, you are probably better suited to a stakeholder pension scheme. While the range of funds where your cash is invested is limited, the management fees charged to you in stakeholder schemes are capped at 1.5% of your funds for the first ten years of the scheme, and at 1% thereafter.

For more ‘heavyweight’ savers, consider a Self-Invested Personal Pension (SIPP)

If you are able to invest larger sums towards your retirement, then a more ‘hands-on’ approach to managing your investment may be appropriate. This might lead you towards a personal pension or a Self-Invested Personal Pension (SIPP), where you have access to a better range of funds. Your financial adviser can help you decide your risk profile, and from there you may discuss investments in individual stocks and shares, individual funds, or perhaps commercial property.

From 2012, the government will take an initiative in pensions provision to company employees, known as the Personal Account.

Here are the questions to be asked regarding the government’s provisions for retirement planning.

Evaluate what the Personal Account will provide

The government has declared that in 2012 it will introduce Personal Accounts, a pension scheme aimed at those who have neither a personal pension scheme nor a company pension scheme.  Those with neither of these types of retirement provision in place will be enrolled automatically in the scheme (‘auto-enrolled’) . However, since the scheme will be state-run, some experts have predicted that the priority will be keeping running costs to a minimum. This could limit the freedom of the managers of the cash to utilise all the investment options available to them.  Consequently, it has been speculated that the scheme may deliver only mediocre returns to members.

Be alert to the current availability of tax relief on pensions contributions

The government currently provides tax relief on contributions to your company or personal pension. According to current thinking, tax relief would also be available by year three of the Personal Account Scheme (i.e. in 2015) as follows: the employee would contribute 4% of his salary, the employer’s contribution would equal 3% of the employee’s salary, and the government contribution would equal 1% of the employee’s salary.

Be aware of what the basic State Pension provides

The basic State Pension is currently set at the (not so) princely sum of £95.25 per week, or £4,953 per year.

Avail of the chance to fill in ‘missing years’ of NI contributions

If you are reaching or have reached pension age between  April 2008 and April 2015, and already have 20 years of NI contributions, it is now possible to fill in gaps in your NI record for years you missed since 1975. You can ‘buy back’ up to 6 years right away by making voluntary contributions. This option remains open to you for six years from your date of retirement.

Check if you will qualify for Pension Credit

If you have no savings or other income besides the basic State Pension, you may be entitled to Pension Credit. This is a supplement to the State Pension which ‘tops up’ the above figures, but is means-tested and is not available to those who have financial resources of their own, such as bank or building society savings.

However, this £34,840 threshold has now increased to £43,888, so that there is an additional £9,048 where national insurance takes away 11% of your earnings. That adds an additional £995 to your annual national insurance contribution. 

In the face of this increase, it’s really worthwhile for those in this salary bracket to look at streamlining their retirement planning, by considering a “salary sacrifice”. 

This is where an employee takes a voluntary reduction in salary to reduce their exposure to National Insurance payments. They request instead that their employer pay more into their pension. 

Not only have they reduced their National Insurance contribution, and increased their pension contribution, but their nett salary remains unchanged. 

For example, a man earning a salary of £41,000 can request his employer to reduce his salary by £3,000. Then he can take the national insurance savings that he and his employer are making, and, with his employer’s agreement, add them into his pension. 

Employers are quite open to such a suggestion, since they are simply redirecting cash into the employee’s pension that they would have had to pay to the government in any case.

Start early, and save hard.

The basic state pension is less than £5,000 a year, and with the average retirement now spanning 20 to 30 years, there has to be more cash ‘in the pot’.

For a full pension, a woman must have 39 years of contributions, and a man 44 years. From 2020, it will be 44 years for both.

Here are a few guidelines if you are planning a pension:

Step 1: Start your pension contributions now

Do not delay – start today! To figure out how much to save, take your age, half it and turn this into a percentage. At 30, for instance, you should be contributing 15% of your income to your pension.

Step 2: Set your retirement planning target

How much will you need for comfort in the retirement stage of your life? Factors to consider are:

· The age you intend to retire

· General living expenses

· Children or dependents

· Desired lifestyle, holidays, hobbies

· Amount of your state pension

· Where you will live

… and remember to take inflation into consideration.

Step 3: Set up a private pension

For a better retirement income, set up your own private pension, as the state pension will just be enough to live on and no more. Its yield will depend on how the underlying investments perform, and the annuity rate when you retire. If your employer offer and occupational scheme it is best to join it as your employer may make contributions. This option is becoming less common with less generous contributions. Payments into personal pensions earn tax relief.

Step 4: Convert your pension into income

You have to convert at least 75% of your pension into an income when you retire. To do this, you must buy an annuity, an investment that pays you a regular income for life. The remaining 25% is yours as a tax-free lump sum.

Shop around to find the best annuity; the choice is crucial, as you are tied in for life.

Step 5: Other investments

You can also top up your income with other investments, such as the Individual Savings Account (ISA), funds, shares, bonds, and property.

In conclusion, set up your pension plan as soon as you can, and do not depend on your state pension.

Invest early and often, for a long and carefree retirement!