In the scramble to use up your allowances on tax-efficient investments such as individual savings accounts (Isas) before the tax year ends on 5 April, don't forget the universal pension allowance. Up until age 75, investors are allowed to invest up to £3,600 a year into a pension and to receive basic-rate tax relief on their contributions (reducing the cost to £2,880), even if they are a non-taxpayer. But there is no carry-over from one tax year to the next, so if it isn't used it is lost.
Your non-earning spouse
Many couples make the mistake of ploughing all their retirement savings into only one partner's pension. However, in households where one partner has an earned income and the other doesn't, it is often tax-efficient to make pension contributions in the name of the non-earner. This is because the non-earning partner will still have a personal allowance in retirement, allowing him or her to draw a retirement income of nearly £10,000 a year tax-free.
The age-related allowance for people aged 65-74 will be £9,940 from 6 April 2011. With a basic state pension of £5,312, an individual could expect to draw £4,628 a year of private income without paying any tax. According to Hargreaves Lansdown, it would take around 17 years of £3,600 contributions to build up a £100,000 fund that could pay an income at around this level.
Investing for children
If you would like to leave a legacy to your children or grandchildren, then remember that the universal pension allowance can also be used to make a £3,600 pension contribution on behalf of a child. Parents and grandparents can make a contribution to children's pensions without it becoming liable to inheritance tax (it can usually be covered by one of the inheritance tax exemptions such as the annual gift allowances, gifts out of surplus income, or potentially exempt transfers). The fund then grows free from income and capital gains tax. Even better, the child is unable to blow the money when they come of age because it is locked away until they are 55.
According to Hargreaves Lansdown, a £3,600 a year contribution for a child from birth to age 18 would be worth £377,000 at age 65; by comparison, if they started saving £3,600 at age 25, it would still only be worth £118,000 at retirement.