Readers' Lives: Taxed by talk of a takeover

I HAVE Norwich Union shares in a single-company PEP. I have read that Norwich Union may be the subject of a bid. If so, what will become of my PEP? Could a takeover create a tax liability?

MG, London

It remains to be seen whether a takeover bid for Norwich Union materialises. But your question is relevant to any company that is taken over, and especially to the many people who have put their building society windfall shares into single-company PEPs.

If you were to receive the shares of the bidding company in exchange for your Norwich Union shares, you would simply have a different company's shares to hold in a single-company PEP. If you were to receive a part- share, part-cash offer, you would have to use the cash to buy more of the bidding company's shares if you wanted to keep the same value of investment in a single-company PEP. If you were to receive a 100 per cent cash offer then you could reinvest that cash in a different company and maintain your single-company PEP investment. There will be no tax liability.

But there is a potential drawback. Do the house rules of your single- company PEP (as opposed to the perhaps more flexible rules of the Inland Revenue) restrict the companies you can hold in the PEP? For example, Barclays Stockbrokers runs a single-company PEP exclusively for Norwich Union.

If you have an inflexible single-company PEP you would have the choice of transferring the money to a different PEP manager. There could be extra costs should a transfer be necessary. But the important point is that you will be able to keep the same value assets in a tax shelter (and without using up the current tax year's PEP allowance) provided you effect the transfer properly. You would need to get advice at the time on how to transfer rather than just close a PEP account.

That's the scenario as regards PEPs today. What happens after PEPs have been replaced next year by ISAs (the new tax-free individual savings accounts) still remains to be seen. Company-specific single-company PEPs can have very low running costs, and this may not be possible with the new ISAs.

I contribute to my employer's group pension scheme and my employer puts in an additional 4 per cent of my annual salary. I get tax relief at 40 per cent on the salary I forgo. Do I get any tax relief on my employer's contributions or are they deemed to be a net contribution?

FH, London

You can ignore your employer's contribution as far as your own tax relief goes, and it has no relevance to what you put on your tax return. Think about it. An employer's contribution to a pension plan is part of your overall remuneration package. But, while your salary is paid direct to you and has tax and National Insurance deducted, no deductions are made from an employer's contributions to a pension plan. So, in effect, you automatically get tax relief.

Employers are allowed to pay into personal pension plans and into group personal pensions they run. These are subject to different rules from company pension schemes. With personal pensions you have to add such contributions to your own gross premiums when working out how much you can pay into the plan. There are contributions limits, starting at 17.5 per cent of your annual earnings to the age of 35 and rising in stages to 40 per cent at the age of 61.

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