View more on these topics

Pension planning after April 5

13.6.2 Planning After 5 April 2001

The new DC tax regime will introduce a range of new opportunities. These will include:

Self-employed



The self-employed will, from 6 April 2001, pay all personal pension/stakeholder pension contributions net of basic rate tax. This will include contributions to all existing personal pension contracts where their contributions have hitherto been paid gross. In addition, self-employed clients will, for the first time, need to provide evidence of earnings where their contributions exceed £3,600 gross in a tax year. Self-employed clients will need to be contacted concerning the above.

Many self-employed clients will decide to continue with the same level of contribution, which will automatically result in an increased contribution to their plan as it will be grossed up for basic rate tax relief. For example, if a self-employed person currently paying £100 gross decides to maintain their £100 contribution this will be grossed up to allow for basic rate tax relief of 22% to £128.20, representing an increase in their overall contribution of over 28%.

The introduction of the new DC tax regime will represent an ideal opportunity to discuss pension planning with your self-employed clients. Moreover, as it seems that they will not be included as members of the new State Second Pension this further increases their need to make their own pension provision.

Children and Non-Working Spouses



The ability to contribute up to £3,600 gross to a new DC tax regime scheme, for any individual aged under 75 who is resident and ordinarily resident in the UK, will set up new opportunities for pensioning a child or a non-working spouse.

It should, however, be noted that a legal guardian will be required to set up a plan for a child under age 18.

Contributions to the plan can be made on behalf of the member by a third party (who does not have to be related to the member). For example, a father could pay a contribution of up to £2,808 net of basic rate tax in respect of his child. This would be grossed up to allow for basic rate tax at 22% to £3,600. If the father is a higher rate taxpayer he cannot claim any higher rate relief, although if the son is a higher rate taxpayer he could claim higher rate relief via his tax return.

Controlling Directors

The ability to pay up to £3,600 gross to a personal pension/stakeholder scheme may also be attractive to those directors of small limited companies who, IR35 notwithstanding, are still able to take most of their income in the form of dividends with only a relatively modest salary (often below the threshold for tax and NI contributions). With the demise of the “de minimis” funding rules under EPP and SSAS, the ability to pay up to £3,600 gross to a DC tax regime scheme is likely to offer the most attractive means of providing for their retirement

Controlling Directors of Investment Companies



Controlling directors of investment companies have been unable to effect an occupational pension scheme under discretionary approval rules and have been unable to treat their earnings as relevant earnings for the purposes of funding a personal pension or S226 contract. As a consequence where such individuals have wished to make retirement provision they have done so under section 590 of the Taxes Act 1988. However, this section of the legislation is very restrictive in terms of the benefits that can be provided.

Controlling directors of investment companies will be one group of people who will be able to particularly benefit from the ability to pay up to £3,600 gross to a DC tax regime scheme provided they are resident and ordinarily resident in the UK.

Partial Concurrency



Members of occupational schemes who are not controlling directors and who have P60 earnings of £30,000 or less can also contribute up to £3,600 gross to a DC tax regime scheme.

For an individual who wishes to make such a concurrent contribution in tax year 2001/02 they will need to have had P60 earnings of £30,000 or less in tax year 2000/01. It is important to remember that P60 earnings do not include taxable P11D benefits. Also that P60 earnings are after deduction of any employee contributions to an occupational scheme, or AVCs. Where an individual&#39s earnings are likely to just exceed the £30,000 earnings limit, an AVC contribution made prior to 6 April 2001 could bring his/her P60 earnings within the £30,000 limit and enable contributions up to £3,600 gross to be paid to a concurrent DC tax regime scheme in tax years 2001/02 – 2005/06 inclusive.

Sections 646B and 646D of Taxes Act 1988



The ability to base the DC tax regime contributions for up to 6 tax years on one tax year&#39s evidenced net relevant earnings (section 646B) and the ability to base contributions for up to five tax years after relevant earnings have ceased on the evidenced net relevant earnings in the tax year of cessation of earnings or any of the five tax years prior to then (section 646D) will initiate new remuneration strategies for controlling directors. These are considered in more depth in section 10 of this report.

Members Transferring From an Occupational Scheme to a DC Tax Regime Scheme



The new transfer rules that take effect from 6 April 2001 may increase the attractiveness of a member, who is neither a high earner nor a controlling director, transferring to a DC tax regime scheme.

Until 5 April 2001 any member of an occupational scheme aged 45 or over at the time of transfer to a personal pension was subject to tax free cash certification. From 6 April 2001 tax free cash certification will only apply to controlling directors and high earners. This may open up opportunities for occupational scheme members, who do not fall into the certification categories, to transfer to a personal/stakeholder scheme and increase their tax free cash sum. This could apply where the member has accrued considerable benefits/fund under his occupational scheme but where his maximum approvable tax free cash sum under the occupational scheme represents less than 25% of the transfer value relating to non-protected rights benefits.




Recommended

Enterprise incentives extended

The decision in the Budget to extend the enterprise management incentive scheme, which helps growing businesses, could benefit IFAs because of the increased wealth generated for the economy. The Budget doubled the amount of share options that benefit from tax relief to £3m and removed the upper limit of 15 employees for companies which qualify […]

Portman offers fixed, tracker and discount loans

Portman Building Society is rolling out a new range of mortgages this week, offering a choice between discounted, fixed and tracker loans. The society&#39s three-year stepped discount reduces its 6.99 per cent standard variable rate to 4.49 per cent until May 2002 followed by a 5.49 per cent rate until May 2003. The redemption penalty […]

Health kick from Sagitta

Sagitta Asset Management has designed a global healthcare fund that aims to exploit investment opportunities in this small but rapidly expanding sector.This Dublin based Ucits invests in healthcare stocks such as biotechnology, medical technology and healthcare management. Stocks will be selected according to their growth potential, although the biotechnology stocks will be later stage companies […]

Capital offers double fee deal

Capital Home Loans is offering IFAs double procuration fees on its new let-and-buy mortgages. The loans allow customers to remortgage to CHL on a property they intend to let out and then apply for a new full-status or self-certification loan on a property they intend to live in. IFAs introducing clients will earn up to […]

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