Tax advice of the week: get a 12% return on a pension

published 23 January 2009

The banks may be offering derisory interest rates, but older savers (aged 50 to 75) can still earn a guaranteed return of up to 12% a year, provided they are prepared to tie up their cash for life, says John Greenwood in The Daily Telegraph.

How? By investing in a pension that lets you draw benefits immediately, known as an immediate vesting pension. The "eye-catching rate of return" comes from a combination of tax relief, a tax-free cash lump sum, and income from an annuity. And the older you are the higher the rate of return as you are likely to receive fewer future annual payments.

A 75-year-old man who pays in the maximum annual £2,880 for a non-worker will have his contribution topped up by £720. The pension is then drawn immediately, giving him a tax-free lump sum of £900 and his first £218.30 annuity payment. Once that rebate has been received his net outlay is £1,761.70, for which he'll get £218.30 a year for the rest of his life (a return of 12.4%). A couple could invest up to £14,400 in the next three months by using their allowances for 2008/2009 and 2009/2010 tax years.