Pension guidance

Pension advice for career breakers

Since the start of the new tax year (6 April 2006), the financial press has been covering in fair volume the changes to UK pension rules. Most career breakers have some pension entitlement, and discussions with many of you have established that this is an important consideration in planning a career break. With more older people and high-flyers now taking time out, the new allowances will be of interest to a substantial number of people.

The changes allow more flexibility in allocating large sums to your pension fund. While the overall limit of your total pension funds remains the same (currently ₤1.5 million), you can now allocate much higher amounts per year. The new rules will especially interest those of you who have abnormally variable or very high earnings.

From 6 April, you can invest up to ₤215,000 per year of your own money into a pension fund. Should you be lucky enough to have a generous boss, your employer can pay in any amount, so long as the overall fund limit is not breached The ₤215,000 limit will rise annually, to ₤255,000 by 2010, as will the overall fund limit in approximate proportion.

For the career breaker, the message is obvious. If you think you need more in your pension fund before setting off on your travels, and if you happen to have ample funds at your disposal, then put as much as you can into your pension and get the tax relief due.

For those not so fortunate to have such sums at their disposal, there is some welcome news at the other end of the scale. A lot of people have small pension funds, often several of them, usually because of a fragmented working life. If your fund is worth less than ₤15,000, then you can take the entirety as a tax-free lump sum at retirement – a meaningful amount for an older person in need of career-break finance.

While we are on the subject, it might be worthwhile reiterating some points we made earlier about pensions. The most important thing about your financial situation is that you review it periodically anyway, and planning for a career break is a good excuse.

We have also stressed that pensions can in fact be fairly risky investments, especially for younger people committing to long-term, rigid policies. The financial world today is in a state of uncertainty due to a number of factors, so investing large sums in risky ventures might not suit the vast majority of you. If you want to add large amounts into your pension fund, then choosing a relatively safe vehicle (say, cash or quality bonds) might be the best course for the time being, assuming you can switch into more rewarding (and risky) investments later on. This especially applies if you are traveling to remote regions, where it will obviously be difficult for you to monitor and manage investments.

As an alternative to pensions, one should not forget the ISA option. Cash up to ₤3,000 per tax year can be put into a mini-ISA, and this is about as risk-free as investments get. If a 5% annual return doesn't inspire you that much, it is a lot better than losing money, a very real prospect in today's shaky world.

Other investments

The world of pensions can get very complicated very quickly, due to the involved nature of many pension contracts, whether private or employer-sponsored. Policies vary widely as to the options you can exercise. Aside from the likely gain you may achieve with a given investment, it is important also to understand any tax obligations that might occur.

The main benefit of UK pension legislation is that it offers tax relief on your contributions, so you won't want to cancel this by falling foul of the rules. For those of you in intricate situations, a trusted financial adviser would be worth consulting.

This article was written by Dan Trimmer, Financial Director of SugarCat Publishing (which runs The Career Break Site).