View more on these topics

Benefiting from the pre-April 2001 regime

This Bill is important to pension professionals because it is the enabling


legislation for the proposed changes to pension taxation which include the


new regime beginning on April 6, 2001.


This new regime will encompass stakeholder pensions, new and existing


personal pensions and those money-purchase occupational schemes which opt


to be included.


The commentary to the Finance Bill 2000 contains a clarification whereby


an individual who takes out a personal pension prior to April 6, 2001 which


has the option of life cover and/or waiver can continue to qualify for


treatment under the old regime and opt for these benefits at any time.


This is helpful because the pre-April 2001 personal pension regime is


broadly better for risk benefits than the new regime will be. This is


particularly true for life cover, where the cost under the pre-April 2001


regime can be up to 5 per cent of net relevant earnings compared with up to


10 per cent of premiums paid each year under the new regime. This basically


means that life cover at a significant level cannot be guaranteed on a


continuous basis.


Consider, for example, someone whose contributions are variable in amount


and may stop or start from time to time. The implication of having a life


cover premium which is linked to those contributions is that the life cover


is similarly going to go up and down and stop or start. It is sod&#39s law


that when someone most needs the cover it will be low or non-existent.


Premium waiver under the new regime is established on a very different


taxation basis from the pre-April 2001 regime. The bottom line is that


those who become waiver claimants under the new regime might be worse off


than if they had taken out the waiver cover under the pre-April 2001


regime.


This would be likely to be true if their reduced income dropped them into


the standard-rate tax bracket where previously they had been higher-rate


taxpayers. This situation arises because tax relief moves from point of


premium to point of claim.


The conclusion from this is that risk benefits are a genuine reason why


someone should consider taking out a personal pension prior to April 6,


2001, even if they do not intend to add the risk benefits until a later


date.


Similar considerations may apply to an employer planning to offer group


personal pensions to the workforce but, in this case, the position is


complicated by consideration of new entrants after April 6, 2001, for whom


the pre-April 2001 regime will not be available.


In this case, rather than provide risk benefits under two different


regimes, the employer might choose to put all risk benefits under a


death-in-service-only occupational scheme which would be in the defined


benefit tax regime.


There is an additional reason why employers might choose to do this. A


quirk in the Welfare Reform and Pensions Act 1999 means that an employer


who offers any occupational pension scheme to all employees does not have


to offer stakeholder to those employees. Clearly, a death-in-service-only


occupational pension scheme is an occupational pension scheme.


The occupational pension scheme does not even have to offer a pension in


order toexempt the employer from the stakeholder requirements.


Employers looking for loopholes to get out of stakeholder or a substantive


pension alternative should not get too excited about this. Civil servants


have let it be known that they are watching out for this and, if it occurs


to a significant degree, the Government will change the Act to plug the


loophole.

Recommended

Supermarkets will not leave IFAs on shelf

It seems that every time you turn round, someone has opened a so-calledfund supermarket.Generically, this is a concept that allows investors and IFAs to accessmanaged funds from a wide range of providers via a single route.Fund supermarkets are, of course, yet another example of new methods offinancial management being imported from the US where, according […]

Sun Bank in ad push to forge more IFA links

Sun Bank, a subsidiary of Sun Life Finance of Canada, is starting on ayear-long marketing campaign to raise its profile among IFAs.The aim is to increase sales of the bank&#39s range of flexible mortgage products.Currently, 25 per cent of Sun Bank&#39s mortgage sales come through IFAs.The campaign kicks off with a series of ads in […]

Independent View

I have been suffering from an enforced absence from the office due to theunwarranted attentions of a man with a knife. A surgeon to be precise.Being confined to the house for a few weeks gives plenty of time forcontemplation and tends to allow the mind to focus on both the future andthe past.What it also […]

Is stakeholder a new breakthrough?

Anyone who has sat through Steve Bee&#39s marvellously witty but eruditeconversations about pensions cannot fail to have spotted that this is anarea where no idea quite works out as originally intended.They may start with every intention of opening up the market in a new andexciting way to reach the unpensioned and offer new opportunities foreasier […]

US equity income: the standout market

By James Hackman, head of US Equities at Neptune With a growing dividend market, very low payout ratios and high dividend cover, the US is one of the standout equity income markets globally. It is also one of the most unloved. James Hackman, manager of the top-performing Neptune US Income Fund, highlights six key facts […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com