Are you making the most of this year’s pension investment allowances?

As we reach the half-way point of the financial year, now is a good time to think about whether you’re taking full advantage of this year’s valuable pension investment allowances. All the more so since this may very well be the last year in which they are so generous.

Under the current pension contribution rules, you can invest up to £40,000 in a private pension – as long as your income at least matches that – and qualify for tax relief at your marginal rate of tax. So for a basic-rate taxpayer, a contribution of £1,000 costs only £800; for higher-rate and additional-rate taxpayers respectively, the cost comes down to £600 and £550.

Pension tax breaks are already under attack. From next April, the rules for additional rate taxpayers will become much less generous. And the lifetime allowance, the cap on the total size of pension fund a saver may have without paying tax charges, is also due to reduce.

Much more significant changes are likely, however. In July’s emergency budget, the Chancellor announced a review of pension-related tax reliefs. Many pension experts expect the result to be serious cutbacks, with higher earners in particular likely to see their tax breaks limited.

In which case, it makes sense to consider maximising your pension contributions this year. You’ll need to be sure you have other shorter-term savings too – and that you’re not in danger of breaching the lifetime allowance – but putting more into a pension will be a good idea for many. Remember that you can carry forward allowances from the last three tax years, which could be worth as much as £150,000 to some people.

Where to put the money?

Still, even if you decide raising your pension contributions is the right choice, you’ll still need to think hard about where you’re going to invest this money. Investment companies are an increasingly popular option, either through the pension savings vehicles some fund managers now offer, or through a self-invested personal pension, which can be managed online or offline.

Investment companies have a bunch of attributes that make them particularly appropriate for long-term pension savings. Above all, their long-term performance track record is strong: data published this week by the analyst Winterflood Investment Trusts found that over the past 10 years, the average investment company has returned more than both the average open-ended fund and the relevant market index in 13 out of 17 asset classes.

There are good reasons for that. Investment companies have historically been cheaper than other types of fund, which is important since charges are such a drag on performance over time. Also, investment companies have the option of taking on gearing in order to enhance returns during strong periods for the market. In addition, they boast certain structural advantages, such as an independent board with a legal duty to hold the fund manager to account.

Towards retirement

In addition, investment companies potentially excel as a retirement planning vehicle for people approaching retirement. Following last April’s pension reforms, savers have much more choice about how they turn pension savings into income when they want to start drawing on what they’ve put in. Fewer savers now automatically buy a life insurance company’s annuity, which provides a guaranteed income for life, opting instead to draw an income directly from their savings, which can then be left invested to continue growing.

The investment company sector is ideal for investors looking for dependable income – more than 30 funds have raised their dividend in each and every year for at least the past 40 years. They are able to do this because investment companies are allowed to keep back some income in good years in order to fund payments when times are not so good.

In other words, investment companies are a good option both when you’re running up your savings and when you’re looking to generate income from them. If you’re taking advantage of this year’s window of opportunity for pension tax reliefs, investment companies are worth considering.