Financial advisers have seen an uplift in the number of farmers who have enquired about setting up pensions in recent months.

Demand is mainly coming from farmers who are expecting to see a rise in profits during the current financial year, as there are various tax benefits associated with paying into a pension fund.

“The UK government is trying to encourage people to put money aside for their retirement by giving tax relief on it,” explained Sean McCann, a chartered financial planner at NFU Mutual.

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The key principle of tax relief is that the money someone puts into a pension is effectively exempt from income tax. How that works in practice depends on the amount of income tax a person pays.

Demand is mainly coming from farmers who are expecting to see a rise in profits during the current financial year

“For every £80 you put into a pension, the government will put £20 in on top. Everyone gets that under basic rate tax relief,” McCann said.

Individuals with taxable income over £50,271 in the 2022/23 financial year fall into the 40% bracket for income tax calculations, known as the higher rate tax band.

“If you are in that position, you can put your pension contribution down in your tax return and you will get another £20 back from the revenue, so in effect, it will only cost you £60 to get £100 in your pension pot,” McCann said.

Pension tax relief is also available for children or family members who have no earnings. For example, up to £2,880 can be paid into a pension fund for a child annually, with the UK government adding another £720 to take it to £3,600.

Withdrawals

The money in a pension cannot usually be withdrawn until the person turns 55 years old, although this is set to rise to 57 years old in April 2028.

McCann said some farmers set up pension funds with no intention of ever withdrawing money from it. Instead, it is often left in a will to non-farming children as pensions are free of inheritance tax.

The amount of money that a person pays into a pension fund can vary over time. It is common for farmers to pay in a small amount every month, with this being topped up at the end of the year if surplus cash is available.

The idea of tying money up in a pension fund for decades can be off putting for some younger farmers, particularly if they are interested in potentially buying land in the future.

However, McCann points out that money in a pension fund can be moved into a self-invested personal pension, known as a SIPP, which can then be used to buy land.

“You would have the block of land in your pension fund and if you were farming it yourself, you would just need to pay a commercial rent into your own pension fund,” he said.

Charges

The pension provider applies annual charges based on the amount of money invested in the fund.

For example, with NFU Mutual, a service charge of 0.45% applies on the first £25,000, which drops to 0.35% on the next £75,000.

On top of that, fund charges apply, which vary across different types of pension funds.

Typical rates for fund charges range from 0.55% to 1.05%. Optional adviser charges can also apply if the person wants to avail of a financial adviser.

The money in a pension fund is put into different investments by the pension provider with the aim of growing the fund over time.

Typical investments include shares in companies, commercial property and debt-based investments such as government bonds.

“It depends on your attitude to risk. Younger people, who will have more time to recover a loss, might go for a pension fund that is higher up the risk rating,” McCann said.

“If you are older and want your money in a few years’ time, you will probably take less risk. Although a lot of people go for mixed funds, which have elements of all those different investments in it,” he added.