Tax boost plan for pensions

The Government is considering insurance industry proposals aimed at boosting the sale of private pensions to young lower and middle-income earners by increasing the maximum tax-free amount they can pay into their schemes.

Separate proposals for the use of tax breaks for people prepared to take out insurance to fund their own long-term nursing home care are also being scrutinised.

The study of both sets of proposals follows extensive lobbying by all the big insurance companies under the umbrella of the industry trade body, the Association of British Insurers.

Insurance industry analysts believe government approval would yield hundreds of millions of pounds a year in extra premiums for the top companies.

Government ministers are believed to be broadly in favour of the principle involved in these changes. Sources within the industry confidently expect that an announcement will be made in favour of both tax breaks as early as the November Budget.

Tony Baker, deputy-director general at the ABI, said: "If these proposals are accepted, then this will be of great help to people who want to prepare for a decent retirement."

Ministers have been told that unless existing rules are relaxed, it will be hard for people to build a pension pot large enough to fund a decent income at retirement. Developing the "saving habit" among young people is seen as a crucial part of the mechanism for weaning the population from reliance on state benefits.

Cuts in local authority budgets have also meant that increasing numbers of the middle class face having to sell their homes to fund nursing care in old age. At present, contributions into personal pensions are linked to a percentage of earnings and based on a person's age.

For people aged 35 or less, payments into a scheme are limited to 17.5 per cent of income. This rises every five years so that contributions can be up to 40 per cent of earnings at age 60 or above.

In practice, someone aged 25, earning pounds 10,000, can pay up to pounds 1,750 a year into a personal pension, including tax relief at 25 per cent. Someone earning pounds 20,000 can place pounds 3,500 into a private scheme. The amendment to the rules being considered would allow annual contributions of up to pounds 5,000 to be made, irrespective of earnings.

Such a change would affect younger people, who face much tighter limits on their contributions. It would also allow low wage-earners to pay in a greater proportion of their income at an earlier point in their earnings cycle, potentially enabling them to benefit from longer-term growth in the value of their funds. Equally, they could lose out if stock markets fall.

The second strand of the Government's proposals involves giving tax incentives on premiums used to fund long-term insurance policies. This would be welcome news for several quoted companies heavily involved in nursing homes. They include Boddington, Vaux, Takare, and Quality Care.

The typical cost of nursing home care in London and the South-east is about pounds 500 a week, and pounds 375 elsewhere in the UK. Residential homes cost marginally less.

Although several companies offer policies that pay towards such care, they have not sold well. The cost of protection worth pounds 200 a week is about pounds 25-pounds 30 a month for a male aged 45, more for women.

Another option under consideration would allow part of the pension lump sum, usually used to buy an annuity, to fund a long-term care policy instead.