The Background
Because the UK government believes people are not saving enough for their retirement it is keen to promote pension savings.
As a result of a 2006 review by the UK Treasury investment gold is now allowed in your tax-efficient pension savings. So if you pay income tax in the UK the government will now pay up to 40% of the cost of gold you buy for your personal pension fund.
This means a top rate tax payer is now buying gold for 60p in the pound, and paying no CGT on any gains.
And it gets better...
The snags with pensions were always :-
- You often couldn't contribute a lot into your fund when it was affordable for you because there were annual limits related to your earnings.
- You had to buy an annuity, sometimes at very poor rates.
- The annuity prevented you leaving your accumulated capital to your heirs.
But these snags are eliminated in the reformed system. You can now contribute under a much more flexible lifetime limit. You can also defer your pension until 75 and then draw it directly from your own fund - without an annuity. Then you can leave what's left to your heirs.
Tax relief & management charges
Things are never completely simple with government schemes.
The deal you strike with the government is - in effect - a deferral of income tax you would ordinarily pay now. You get back the tax now so that you fund your retirement savings with your own untaxed income. Then you eventually pay tax on the income you draw from your pension.
For the securities products which dominate pension portfolios the management costs have steadily escalated. So now the original tax benefit is often taken back by accumulated charges.
For example, with a typical trust, after investing 60p tax paid, and receiving 40p from the government, the resulting pound is quickly diminished back to 60p by those high management charges. Then when the remainder is distributed back to you when you retire you end up paying tax on it, which is far from efficient! This has made many intelligent investors seek direct control over their investments, via Self Invested Pension Plans and low cost services like BullionVault.
A major attraction of investing in gold in this way is that the management costs are truly tiny - less than one tenth of the charge applied on typical unit trusts. The result is that the tax benefit on your pension fund is enjoyed by you, and not a fund manager. You keep the benefits of the tax rebate, even after 30 years.
Who benefits from your pension tax rebates?
Click here to see the effect of charges on unit trusts compared to BullionVault gold.