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Stakeholder&#39s personal connections

Ten months after stakeholder opened for business, there is still a

lot of confusion around. The source of this confusion appears to be a

perception that fundamental differences exist between stakeholder

pensions and personal pensions.

The truth is that both stakeholder and personal pensions (including

the self-invested variety) are subject to the same Inland Revenue

rules. They are effectively the same thing.

So what is causing the confusion? We need to consider product

offerings, employer requirements and the post-April 2001 rules.

Product offerings

Many life offices now offer both personal pensions and stakeholder.

Stakeholder must keep total annual management charges to within

1 per cent of the fund but, other than this restriction, there are

not a lot of product differences.

Most stakeholder pensions being offered are, in fact, based on

personal pension rules. With many providers now marketing personal

pensions on low charges, it would be difficult to spot the difference

between the two products.

Perhaps one area where

a personal pension still has

an advantage is its ability to allow the customer to pay for advice

through the product rather than being forced down the fee route. This

is an imp-ortant distinction as the

bulk of advice is still paid for in this way.

Employer requirements

The Government has specified that all employers must designate a

stakeholder scheme if they have five or more employees.

The scheme must then

be offered to all “relevant” employees (these are employees

satisfying certain conditions for example. having been continuously

employed for three months).

However, it is possible

to avoid designating a stakeholder scheme by offering

a group personal pension


All employees must be offered membership within three months of

joining. In addition, the employer should offer to pay a contribution

of at least 3 per cent of

basic pay.

From October 8, 2001, this contribution could be made conditional

upon the employee matching the employer contribution (up to a limit of

3 per cent of basic pay).

Like stakeholder, there should be no exit penalties from the GPP and

payroll deduction should be available.

An exemption, which is subject to different conditions, is also

available for occupational pension schemes.

Well, that is about all there is to say about the difference between

stakeholder and personal pensions. But something else changed on

April 6 last year.

Actually quite a lot changed that applies to both personal pensions

and stakeholder.


Without having to prove your income, a contribution of up

to £3,600 each year (gross) can be paid by any eligible person.

Eligible people include all individuals under the age of 75 (this

includes children), employees not in pensionable employment, the

self-employed and partners, and those not in employment.

Where a higher contribution is allowed under the old-style

age-related maximum contribution limits (between 17.5 per cent and 40

per cent of earnings), then a contribution of more than £3,600 can be

paid subject to evidence of earnings.

Carry-forward scrapped, basis year introduced

It is no longer possible to carry forward unused tax relief from

previous tax years although there is a window of opportunity if a

valid election is made before January 31 to carry back a contribution

paid in the current tax year to 2000/01.

In place of carry-forward will be the basis-year method. This allows


to be paid for five years on the strength of one year&#39s earnings.

For example, individuals who are going overseas to work can continue paying

contributions based on their UK earnings, even if these were last

earned three or four years previously.

The basis-year method

is also a useful facility for

self-employed people whose earnings fluctuate from year to year.

The new rules allow them to lock in their contributions at a high

level, for example, if they have a good year where profits are high.

If earnings are higher in any of the following years, it is possible

to reset the basis year.


This allows employees (but not controlling directors) in pensionable

employment, with earnings of £30,000 or less, to contribute up to

£3,600 (gross) each year into a personal pension or stakeholder, in

addition to contributions of up 15 per cent of earnings into their

occupational pension scheme.

Benefits from stakeholder are also paid in addition to the maximum

allowed by the Inland Revenue under occupational pension schemes.

This is a very useful facility, allowing employees who have left

their pension planning late to catch up or aim

for early retirement. It could also help younger people with free

funds to build up a decent pension pot before other financial

commitments reduce their spendable income.

New transfer regulations

For transfers to personal pension or stakeholder from occupational

pension schemes (including executive pensions and SSASs), there are

two main changes to be aware of.

First, an overfunding check, known as an appendix XI check

(previously GN11) now only needs to be carried out for high earners

aged 45 or over and controlling directors.

Previously, all high earners, regardless of age, had to pass this

test before they could transfer to a personal pension.

This means that fewer people will be tested. Anyone failing this test

will not be allowed to transfer to a personal pension.

Second, the new appendix XI check uses a prescribed basis for

calculating the maximum transfer value, whereas the old GN11 check

allowed the actuary who carried out the calculation some discretion

over the factors used.

Generally speaking, this will result in lower maximum transfer

values, meaning that more of the people who are tested will fail.

Change in the way that tax relief is given

Before April 6, employees paid contributions net of basic-rate tax

and self-employed people paid gross.

Now, both these groups pay contributions net of basic-rate tax.

There has also been another subtle change in the way the calculation

is carried out. Pension contributions were deducted from total income

before tax was calculated.

The new method adds the amount of the contribution to the basic-rate

income tax band, for example, employees are normally taxed at higher

rate on taxable income above £29,400.

By paying a contribution of £5,000, the basic-rate band would be

increased to £34,400. This change in the method of calculation does

not affect the amount of tax paid.

Life cover and waiver of contribution benefit

The premiums payable for new waiver of contribution benefit taken out

after April 2001 are no longer tax-relievable. The result of this is

that separate insurance needs to be taken out to ensure that pension

contributions can continue in the event of accident or long-term


One advantage of the new arrangement is that the benefits payable are

now regarded as the income of the individual and gain tax relief when

paid into their personal pension or stakeholder. Under the old

arrangements, there was no tax relief given on the benefit.

Life cover on new personal pensions and stakeholder pensions has been

virtually killed-off by the post-April 5 rules. These limit the tax

relievable premium to 10 per cent of total pension contributions as

against the old limit of 5 per cent of net relevant earnings.

For most people, the new rules drastically reduce the amount of life

cover they can have within their personal pension or stakeholder

pension. The only alternative is non-pension life insurance. This may

not be such a bad outcome, as the market for life cover has become

increasingly competitive in the last few years, with premium rates

falling sharply.

Remember that all these changes apply both to personal pensions and

stakeholder pensions.

When the Government issued its Green Paper Part-nership in Pensions

three years ago, it referred to stakeholder as “Our new secure,

flexible and value-for-money stakeholder schemes…”

Isn&#39t it funny that it turns out to be a good old personal pension?


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