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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


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


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



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