Stakeholder pensions represent one of the most significant new tax-planning opportunities for a generation. Okay, so perhaps I exaggerate a little – but not too much.
It is easy to think of stakeholder only in the context of simpler products and lower margins. Stakeholder undoubtedly opens up opportunities both for financial advisers and providers to develop high-volume, low-margin business.
But the new tax regime covering stakeholder, personal pensions and occupational schemes brings opportunities for corporate and individual tax planning. Enormous scope remains for the provision of quality advice, especially to high-net-worth clients, during and beyond a period of significant change.
Let us look at some of the new features available.
Contributions of up to £3,600 may be made without the need for earnings. This will create new business opportunities for swathes of individuals currently prevented from investing in pensions. The Government's aim may have been to facilitate access for carers but, in practice, the opportunity for pension planning for spouses and children in more affluent circumstances will represent a more attractive option for advisers.
The presumption of earnings rule, under which earnings can reduce over a five-year period but contributions do not have to, introduces greater flexibility.
This may be of particular value to the self-employed and may also provide directors whose remuneration strategy is biased towards dividends with poss- ibly better tax planning opportunities than under an executive pension plan. It can also provide better pension provision during a period of partial retirement, where earnings dip down but pension funding can be maintained.
The cessation of earnings rule, enabling higher-level contributions to continue for five years after earnings have ceased, provides valuable ongoing investment and tax-planning opportunities on retirement and, potentially, on career breaks.
The interplay with the presumption of earnings rule must be watched, since recommencement of earnings during the five-year post-cessation period will move the client back to the presumption rules.
The ability to manage pension assets either side of retirement is more flexible than ever.
Contributions to an executive pension plan to optimise the retirement fund during a director's career can culminate in a switch to personal pension funding before retirement. This will set up the possibility of using the cessation of earnings rules post-retirement to enhance funding further, providing benefits are not taken under the occupational scheme.
The amendments to the transfer regime will introduce new options for clients whose benefits may be close to or above maximum funding on how they should best structure their pension provision. The ability to transfer up to the specified level of pension and leave any balance to be treated as a surplus introduces valuable flexibility for those seeking to use the advantages and features from personal pension drawdown.
Previously, of course, transfers could be blocked by failing the GN11 test.
A flexible retirement arrangement involving recycling of income from an income-drawdown plan into a personal pension using the cessation of earnings rule may also provide an optimal solution for individuals where income levels are not critical (with the exclusion of controlling directors in some circumstances).
The new concurrency provisions allowing members of occupational schemes to invest up to £3,600 to stakeholder or personal pension will help maintain such business when people move to employers which have occupational schemes.
The caveats which must be met to take advantage of concurrency are straightforward – the employee must not be a controlling director and earnings must be less than £30,000.
Professionals, and others in occupational schemes who expect earnings to increase rapidly, could still enjoy the benefits of concurrency for five years following a year (not earlier than 2000/01) in which their earnings are below £30,000. And it looks like the benefits from such contributions will not have to be treated as retained benefits.
Many controlling direc-tors and successful self-employed individuals will certainly need advice in managing pension contributions where the spouse works within the business.
New opportunities arise as the earnings' link with personal pension contributions up to £3,600 is removed and from April 2002 the state pension scheme benefit structure is significantly enhanced for low-earners.
And, of course, in the run-up to April 6, 2001, opportunities arose for selling benefits which will cease to be available thereafter, such as:
l Carry-forward of unused tax relief has been abolished. It is a case each year of “use it or lose it”.
Advisers should already be flagging with clients the final opportunity for unused relief as at April 2001.
The idea of splitting contributions between tax year 2000/01 and the period April 6, 2001 to January 31, 2002 (using the facility to carry back) should also have been carefully considered to optimise tax relief.
l The better-quality protection options available under the old tax regime (both for waiver benefit and death benefit) provided an opportunity to effect a contract before April 5, 2001 to which these benefits could be added (possibly subject to underwriting) thereafter.
The need for quality pension advice is not killed by stakeholder, it is transformed. Significant opportunities arise for advisers, not just in the high-net-worth market but more widely as more individuals build significant funds and seek advice on their management.
John Glendinning, Director of pensions development, Scottish Amicable