I expect it is a good thing to change the rules every so often. That way, few of us ever get to grips with the current ruling so we need lots of guidance on how to get it right.
Sometimes, that is how it feels with pension legislation. It certainly keeps technical gurus in a job both in the financial services industry and the Inland Revenue, so perhaps we should not complain.
If we do aspire to being technical experts, however, it is as well to get things clear in our heads as to the current position and the new position after stakeholder is introduced.
Carry-forward is the method by which people can catch up now on personal pension payments where the maximum was not paid in the past.
Carryback is, generally speaking, where contributions paid this year are treated for tax relief purposes as though paid in an earlier year.
Current rules are about to change. Next week, we will look at the new rules. However, we need to make sure we take advantage of the current rules which only apply until the end of tax year 2000/01.
The new rules will apply to personal pension contributions deemed paid in 2001/02 and future years. The current rules will continue to apply to retirement annuities even after April 5, 2001.
Personal pensions, carry-forward and carryback 2000/01
Contributions must be paid by April 5, 2001 to ensure everything goes through smoothly.
Unused relief can be carried forward to 2000/01 from 1994/95-1999/2000.
Contribution can be carried back to 1999/2000 if claim made by January 31, 2002.
If a carryback claim is made, unused relief may also be available from 1993/94.
The chart (right) shows timescales for contributions and to whom claim forms should be sent.
Why use carry-forward?
It allows you to pay more than you could normally pay to a personal pension by making up for underpayment in earlier years. It is a buy now while stocks last opportunity.
Why use carryback?
The basic income tax rate in 1999/2000 was 23 per cent and in 2000/01 it is 22 per cent. Some people will get more tax relief by carrying back.
If your client was a 40 per cent taxpayer in 1999/2000 and a basic-rate taxpayer in 2000/01, again, carryback would yield more tax relief.
By carrying back, many self-employed clients will get the tax relief on their gross contribution quicker. A tax refund is never given unless the relevant year's tax bill has been paid. Generally, last year's tax bill is paid before the current year. You do not always get a refund, however. The tax relief may be given by setting the relief against a tax bill due within 35 days of the claim.
As employed clients pay the contribution net, carryback may not make much difference for basic-rate taxpayers, except where there is a reduction in the basic rate of tax.
Carryback does not reduce the client's tax bill for the purposes of setting the following year's payments on account.
2000/01 personal pension checklist for IFAs
Review all your personal pension client files. How many have unused relief available for 1993/94-1999/2000? Probably most of them. Consider doing a mailing to all clients, drawing attention to the limited opportunity left to use this relief to top up their pension contributions.
Speak to and/or mail your accountancy connections with the aim of perhaps doing a joint exercise with clients to draw the unused relief opportunity to their attention.
Review clients' files and liaise with clients and/or their accountants on the advisability of carrying back contributions to 1999/2000. There are pros and cons to carrying back. For some clients, it would be advisable and for others it is not.
Check the forms that need to be completed, who they should be sent to and the dates they need to be in by. Make sure your own files have copies of PPCC and increment receipts PP42, PP43 and PP120s where appropriate.
Should the personal pension be written under trust? For IHT purposes, there is no difference in a trust or a nomination of beneficiaries. The general rule is that the pension death benefits will be disregarded.
However, by writing the policy under trust, the death benefits will be speedily paid out to the trustees who can then distribute them according to the trust instructions. Under nomination, it may take the pension administrator some time to decide who should benefit.
All retirement annuities should be written under trust, otherwise the death benefits will be included in the estate and so subject to inheritance tax.
In choosing a trust, make sure you keep it flexible, with the opportunity to add beneficiaries in the future if your client's circumstances change. I have recently come across a trust with a very restricted range of possible beneficiaries and no flexibility to add others.
Because the range of beneficiaries was so restricted, the person who would probably benefit if the member died was the spouse – or more precisely the ex-spouse, as they are now divorced. As you can imagine, this was not what the member would want. The moral of the story is keep the trust flexible, with a wide range of possible beneficiaries.
Next week, we will look at the opportunities to continue to use the current legislation after April 2001 and the new legislation that will apply.