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Taking advantage of the retirement annuity rules

Retirement annuity contracts are not subject to the new defined-contribution tax regime rules but retain their existing tax rules. There are three main areas of consideration for individuals holding retirement annuity contracts.

Ability to pay higher contributions than to a defined-contribution tax regime scheme

Although higher contributions may normally be paid to a defined-contribution tax regime scheme, an individual with earnings well in excess of the earnings cap (£95,400 in the current tax year) may, in fact, be able to pay a higher contribution to a retirement annuity contract.

In this regard, it should be remembered that any contribution to a defined-contribution tax regime scheme during the current tax year will automatically restrict the maximum contribution for that tax year to the maximum under the defined-contribution tax regime.

Ability to carry back a contribution

While contributions paid between February 1 and April 5 during a tax year to a defined-contribution tax regime scheme cannot be carried back to the immediately preceding tax year, this is not the case where retirement annuity contributions are concerned. A contribution paid by April 5, 2002 can be carried back to tax year 2000/01 (or exceptionally to tax year 1999/2000 where an individual had no net relevant earnings in tax year 2000/01) provided an that election to do so is made no later than January 31, 2003.

This could be particularly attractive where an individual was a higher-rate taxpayer in tax year 2000/01 but is only a basic-rate taxpayer in the current tax year.

Ability to carry forward a contribution

Where an individual has unused relief over the six previous tax years, advantage can continue to be taken of carry forward. Where carry-forward is linked with carryback, this will enable unused relief to be picked up in respect of tax years 1994/95 onwards.

Tax relief will be available on the contribution either in the tax year in which it is paid (2001/02) or the tax year to which it is carried back (2000/01).

As carry-forward is no longer available to members of defined-contribution tax regime schemes, this will be an opportunity to pick up unused relief which would otherwise be lost.


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