So the end of carry-forward is in sight from 2001/02. Is that the end of life as we know it? Perhaps. But the advent of stakeholder pensions means there are still opportunities for those willing to come to grips with the new rules. What are those rules?
l It is not generally necessary to have any earnings in order to pay into a pension taken out after April 6, 2000. The maximum contribution allowed is the greater of £3,600 or the age-related percentage of net relevant earnings.
l Members of an occupational pension scheme with income from that employment in excess of £30,000 cannot contribute to a personal pension unless they have other relevant income from self-employment or non-pensioned employment.
Similarly, a controlling director of a company or someone who has been one within the last five tax years cannot join a post-April 6 personal pension. Tax years before 2000/01 do not count.
Other members of occupational schemes with earned income of less than £30,000 can contribute up to £3,600 a year to a personal pension.
To start a personal pension, individuals will generally need to be UK residents. Those who subsequently become non-UK residents can continue their personal pension using one of the previous five years as the basis year.
Pension contributions will be paid net of basic-rate tax both by employed and self-employed individuals.
Where contributions in excess of £3,600 a year are being made, they must be justified by reference to a basis year. This basis year can be the year of payment or any of the previous five years. The level of contribution is calculated as the relevant percentage of NRE in the basis year based on the individual's age in the current year.
When an individual stops working, they can continue to pay into a personal pension for the following five years. The maximum level of contribution will be the greater of £3,600 or the relevant percentage in the basis year but using the individual's age on April 6 of the year of payment.
The combination of these normal and cessation rules means that a good basis year can be used to justify contributions in the following 11 years where the individual retires in year six.
After the end of this period, the normal contribution rules will apply. If the individual does not have any NRE, they will be restricted to contributing £3,600 a year.
A claim can be made to have contributions carried back to the previous tax year provided the claim is made by January 31 in the tax year of payment and is made simultaneously with the contribution.
Ten per cent of personal pension contributions can be paid towards life cover within a plan. This is a major change from the previous rules. It should be noted that, if pension contributions are reduced, the planholder may have to lower the life cover with serious consequences.
Personal pensions can be taken out by or on behalf of minors from April 6, 2001. Tax relief will be given according to the tax status of the minor .
The legal guardian of the child will complete the application form on behalf of the child and will be responsible for looking after it until the child is 18. After that time, the child will be responsible for his or her own policy.
Employer contributions can be paid subject to the same rules that have applied in the past. It should be borne in mind that employer contributions are not assessable on the employee as a benefit in kind, cannot be carried back to the previous tax year and can only be paid by reference to earnings from that employment with the proviso that £3,600 can be paid in total in any year without evidence of earnings. Contributions can be paid while the employee is an employee and in the tax year they leave service.
So what are the opportunities for IFAs in the post-April 6 pension environment?
The children and spouses of existing clients may now be eligible to contribute to a stakeholder pension. However, the benefits of (at least) basic-rate tax relief need to be balanced against the lack of access to the pension fund until at least age 50 and the fact that some of the fund will need to be taken as a taxable pension.
The current generation of children will have amazing pension funds at 50 or later if their parents can afford to set up these plans now. This is a new market although it is one that possibly only your more affluent clients can take advantage of. Most people have difficulty maximising their own pension without taking on those of spouses and children.
Clients who might consider income-drawdown schemes but who do not necessarily need the income could take tax-free cash or start drawing an income of between 35 and 100 per cent of GAD. They could then use the income from the drawdown arrangement to fund a new personal pension.
The new personal pension will generally be outside their estate for inheritance tax and the value of the fund be paid free of tax on their death. This compares with an income-drawdown arrangement where any lump-sum death benefit will be hit with at least a 35 per cent income tax charge.
Alternatively, if the individual survives, a tax-free cash sum can be taken from the scheme with only the balance of the fund taxable as pension. This compares favourably with the whole of the remaining drawdown fund being taxable.
All clients, including the self-employed will now pay their contributions net of basic-rate tax. Many clients who formerly paid gross contributions may be prepared to continue to pay the same contribution under the net payment regime. Effectively, this will be an increment.
For example, if a gross monthly payment of £100 becomes a net payment of £100, the gross contribution goes up to £128.20. Bear in mind, however, that your client will be used to getting all the tax relief in the annual income tax assessment. Paying a net contribution means only higher-rate tax relief will be given in the assessment. This must be made clear to the client, otherwise there could be a shock when it comes to tax payment time.
Stakeholder may not be looked on as a business opportunity by a lot of IFAs. But it is essential to keep up to date with the rules and regulations and to take advantage of any openings that these new rules offer – both for the client and the IFA.