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Pensions

Although pensions continue to be a prime focus of the Government, this year&#39s Budget contains very little on pensions. This is not surprising in view of the significant changes introduced by the Government over the last year or so (eg. DC tax regime, stakeholder pensions and the State Second Pension). The Government is also consulting on many other issues, principally regarding the simplification of pensions, the modernisation of annuities, the introduction of a long-term funding standard for final salary schemes and the provision of illustrations for money purchase schemes.

Stakeholder pensions and the new DC tax regime are now just over one year old and continue to provide a number of highly attractive tax planning opportunities. There had been some speculation that the Government may seek to restrict some of these opportunities, although such fears have been proved to be unfounded.

THE EARNINGS CAP
A number of directors will have a keen interest in reducing both corporation tax (and also employer&#39s National Insurance) and personal levels of income tax. In particular, a number may enjoy a high level of earnings in excess of the earnings cap which has been increased to £97,200 for tax year 2002/2003.

Where such directors are unable to pension their earnings over the cap by means of an approved occupational scheme (as they are neither pre 87 nor 87-89 regime members) they should give serious thought to the establishment/use of a Funded Unapproved Retirement Benefits Scheme (FURBS) to pension these. While this latter arrangement offers no special corporation tax, NIC or income tax benefits at outset (the contributions, usually being deductible as a business expense, but assessable to income tax on the director and, within the normal limits, subject to NIC) they can offer

  • an income tax and capital gains tax reduced home for investments
  • IHT free payment to dependants on death of a member before taking benefits
    and
  • benefits payable wholly in cash

ANNUITIES
The Government announced that following its consultation paper &#34Modernising Annuities&#34, which was designed to increase the choice of annuities for consumers and ensure annuities provide a secure income in retirement, it will be

– working with annuity providers to increase flexibility by allowing those who have an annuity to change the terms of their contract with their existing provider, and

– bringing forward powers to enable new generic kinds of annuity to be used to turn pension savings into retirement income.
While any comment on the &#34modernising&#34 proposals will have to await the detail of what the Government are offering it is a shame that they have steadfastly opposed the more radical proposals put forward by David Curry MP in his Pension Annuities (Amendment) Bill.

SIMPLIFYING PENSIONS
The Government has set up three co-ordinated reviews to examine different aspects of pension provision and will consult on their proposals later this year. The aim will be to reduce complex regulation, improve information and education and consider what action the Government and employers can take to encourage employees to save towards their retirement.

These are the so-called simplification reviews. While the whole industry would welcome a reduction in regulation and red tape, making such changes may be very difficult. Simplifying benefits for individuals taking out pensions for the first time may be relatively straightforward but trying to amend the entitlement of exiting members is far more difficult particularly if the new rules provide less attractive benefits. However, if the old rules remain, pensions will only become ever more complex even if new simpler rules are applied in respect of new members.

If simplification is the order of the day one good starting point would be a radical overhaul of the State Second Pension and its contracting out rules which are immensely complicated.

TAX PLANNING AND THE DC TAX REGIME
The new DC tax regime has been in force now for just over a year. It has introduced a number of very attractive tax planning opportunities which include

Children and Non-Working Spouses
The ability to normally 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, sets up new opportunities for pensioning a child or a non-working spouse.

It should, however, be noted that a legal guardian is required to set up a plan for a child under age 16 (or under age 18, where the child is not employed and is resident in England or Wales).

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 in respect of his child. This would be grossed up to £3,600 by the scheme provider to allow for basic rate tax at 22%. If the father is a higher rate taxpayer he cannot claim any higher rate relief, although if the child is a higher rate taxpayer he/she could claim higher rate relief via his/her 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 are one group of people who are 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 2002/03 they will need to have had P60 earnings of £30,000 or less in either tax year 2000/01 or 2001/02. 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 in tax year 2002/03 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 2003/04 – 2007/08 inclusive.

Sections 646B and 646D of Taxes Act 1988
The ability to base the DC tax regime contributions for up to six tax years on one tax year&#39s evidenced net relevant earnings (section 646B) and the ability to base contributions in the five tax years immediately following the tax year in which relevant earnings have ceased on the evidenced net relevant earnings in the tax year in which relevant earnings ceased or any of the five tax years prior to then (section 646D) has brought about new remuneration strategies for controlling directors. These are considered in more depth in section 11 of this report.

Obtaining More Than 40% Tax Relief
Section 639(5A) of the Taxes Act 1988 provided that tax relief will be granted on an individual&#39s gross stakeholder/personal pension contributions by extending the individual&#39s basic rate tax band by the extent of the gross contribution.

This can have the effect of providing tax relief at 44.5% where a higher rate taxpayer pays a contribution which results in all or part of his dividend income being brought from higher rate into basic rate tax.

A similar effect will be achieved where chargeable gains are brought from higher rate into basic rate tax as a result of a pension contribution although in this case the relief will be limited to 42%. Advantage is taken here of Extra Statutory Concession A101 which provided that relief should be granted against chargeable gains in such circumstances.

Members Transferring From an Occupational Scheme to a DC Tax Regime Scheme
The new transfer rules which took effect from 6 April 2001 may increase the attractiveness of a member, who is neither a high earner nor a controlling director, transferring his occupational scheme benefits 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 has opened up opportunities for occupational scheme members, who do not fall into the certification categories, to transfer their benefits to a personal/stakeholder scheme and increase their tax free cash sum. This can 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 his non-protected rights benefits.

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