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
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's 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