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Pension planning pre April 5


  • Pensions have always formed an essential part of a client&#39s end of tax year planning. Appropriate pension planning will be even more important in the lead up to 6 April 2001 as account will need to be taken of the provisions of the new DC tax regime which will replace the existing personal pension tax rules from that date.

    13.6.1 Planning Prior To 6 April 2001

    A number of the existing provisions under the personal pension rules will no longer exist under the DC tax regime, or will be less attractive. In order to take advantage of these, action will need to be taken by 5 April 2001. These include:

    Waiver of Contribution

    Tax relievable waiver of contribution insurance will no longer be available as a relevant benefit for a DC tax regime scheme set up on or after 6 April 2001. However, where a client has a personal pension scheme which was set up prior to 6 April 2001, which includes a waiver of contribution option, it will continue to benefit from tax relief on the contributions even if the option is not exercised until after 5 April 2001.

    Life Assurance Cover

    Currently, a member of a personal pension scheme can pay up to 5% of their net relevant earnings (NRE) each year to provide life assurance cover. This is irrespective of any contribution made to provide pension benefits except that it forms part of the overall maximum allowable contribution limit to a personal pension scheme. From 6 April 2001 the maximum life assurance contribution will be restricted to 10% of the contributions payable to secure pension benefits under all DC tax regime schemes of the member. This will not only result in reduced maximum allowable contributions to provide life cover when compared to the current rules but also the end of stand-alone pension term assurance (unless the member is paying pension contributions to other DC tax regime schemes).

    However, where a personal pension plan was set up prior to 6 April 2001, and includes an option to provide life assurance benefits, the current rules (ie. contributions of up to 5% of NRE) can continue to apply. As with the waiver benefit, the existing rules can apply in such a case even if the option is not exercised until after 5 April 2001.

    Carry Forward

    Carry forward is to be abolished from 6 April 2001. However, it will still be possible for a contribution paid between 6 April 2001 and 31 January 2002 to be carried back (using the new DC tax regime carry back rules) to tax year 2000/01 enabling a member to take advantage of the existing carry forward rules. If the carried forward relief is not utilised it will be lost forever.

    Where a client has considerable unused relief but insufficient readily available monies to maximise carry forward prior to 5 April 2001, advantage can be taken of the above carry back provision. Part of the contribution can be paid prior to 6 April 2001 with the balance being paid between 6 April 2001 and 31 January 2002, and being carried back to 2000/01 tax year.

    One possible strategy that may be considered by a client able to control their remuneration is to increase this in tax year 2000/01 by the amount of carried forward unused relief they can claim. For example, if a client had NRE of £40,000 and unused carried forward relief of £20,000, all of which is to be utilised in tax year 2000/01 he could consider increasing his remuneration by £20,000 to £60,000. By so doing there will be no increase in his tax bill as the tax on the increased remuneration will be matched by the tax relief due on the unused relief. However, his increased remuneration of £60,000 could then be used as the "basis year" for contributions to his personal pension scheme in tax years 2001/02 – 2005/06 inclusive under the provisions of section 646B of the Taxes Act 1988. As he is able to control his remuneration he can then reduce his salary in tax years 2001/02 &#452005/06 and maintain his income by taking dividends. Even if he reduces his remuneration, contributions for tax years 2001/02 &#452005/06 can still be based on his “net relevant earnings” from his “basis year” of 2000/01.

    Carry Forward With Carry Back

    There are a number of reasons for a client considering using carry back with carry forward. These include:

    • By carrying back to 1999/2000 tax year, it will be possible to pick up unused relief in 1993/94 tax year which would otherwise be lost forever

    • Where the client is a higher rate taxpayer in 1999/2000 tax year but only a basic rate taxpayer in 2000/01 tax year

    • Where the client can maximise their tax relief at higher rate by carrying back part of their contribution to 1999/2000 and claiming tax relief in both tax years 1999/2000 (the carry back tax year) and 2000/01 (the current year of contribution)

    • Where the client is a basic rate taxpayer advantage can be taken of 23% tax relief in 1999/2000 as opposed to 22% in the current tax year.

    Controlling Directors, High Earners and Transfers

    Where a controlling director or high earner is a member of an occupational scheme and is looking to transfer their benefits to a personal pension (eg. perhaps to gain greater flexibility of benefit payment or an enhanced lump sum death benefit) it may be advantageous to undertake the transfer prior to 6 April 2001.

    From 6 April 2001 new rules will apply where transfers are made from an occupational scheme to a personal pension. These will include a new “overfunding test” which has to be passed by controlling directors and high earners before they can transfer. It is felt that the new test may, in many cases, result in a lower transferable fund and hence prohibit some transfers taking place. Therefore where such a member wishes to transfer, and their benefits are likely to be close to the maximum permitted by the current overfunding test, it may be advantageous for them to transfer prior to 6 April 2001.

    It should, however, be remembered that where a transfer is to be made from a SSAS to a personal pension, advance approval has to be sought from the Pension Schemes Office. The PSO have recently indicated that unless they receive properly completed transfer requests (including the information set out in PSO Update 36) by 9 March 2001 it is unlikely they will have sufficient time to process them to enable transfers to be made by 6 April 2001.


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