This year sees a number of major changes to pensions. Stakeholder is the dominant word in the new pension universe but the opportunities are not just limited to those provided by the launch of stakeholder. Here are 10 ideas that I believe IFAs would do well to exploit over the next few months.
Pensions and divorce
Pension sharing is now an option for those who start divorce proceedings. It allows for a clean break settlement at the point of divorce with a split of the pension assets.
While one spouse can be made a sub-member of the other spouse's pension scheme, many trustees will prefer to avoid this complication by offering a transfer value. With over 180,000 divorces in the UK each year, initial estimates are that up to 50,000 may involve some element of pension sharing.
This means 100,000 opportunities for IFAs to provide specialist advice and up to 50,000 potential transfers.
For pension sharing to work effectively, the specialists need to work together and now is the time for IFAs to develop strategic alliances with solicitors who will need help and advice.
Carry-forward -use it or lose it
Carry-forward of unused relief is abolished on April 5 so clients should be contacted to see whether they could benefit by acting now.
Although there will be a last chance opportunity to use carry forward until January 31, 2002 by combining it with carryback, it can make sense to make use of the tax relief if clients have the money now. The cost of delay, possible changes to higher-rate relief and the loss of the earliest tax year all make sound reasons to act now.
Changes to waiver of premium and life cover
Two of the major changes as a result of the new DC regime from 6 April are the changes to waiver of premium benefit and life assurance under personal pensions.
Waiver will no longer be allowed as an option for new plans. Instead this would need to be arranged under a separate policy. This affects the current tax reliefs available. No relief will be allowed on contributions and although benefits claimed will be grossed up with basic rate relief, the changes will impact most on higher-rate taxpayers.
Life cover will also be restricted. The current rules allow 5 per cent of net relevant earnings to be used for life cover. The new rules limit premiums to 10 per cent of the pension contribution.
These changes could restrict the amount of cover which could be provided or require clients to increase their pension contributions to maintain the required level of life cover.
To transfer or not to transfer? That is the question
From 6 April 2001 the rules covering transfers from occupational pension schemes to personal pensions will change.
Changes to maximum lump sum death benefits and the removal of the tax free cash certification in some cases may encourage some clients to transfer prior to 5 April and others to hold off until the new rules take effect.
This could be important for anyone who has completed the funding of his or her pension benefits and is likely to transfer to a personal pension at some stage to access income drawdown.
Investors drawing income can now transfer between drawdown plans. Previously, once income commenced, this was not allowed thus locking clients into perhaps unsuitable or poorly performing plans.
This will lead to a review of many plans. Investors who took out drawdown plans before the market fully developed may be looking for guidance.
Remuneration for directors
April 5 is also the deadline for any pay restructuring to take account of the “carry on” rules that apply after then.
By temporarily increasing Schedule E earnings for 2000/01, a higher maximum pension contribution can be set up. The higher level will last for five years under the new rules even if the salary reduces during this time. This will be attractive to directors who follow a dividend-orientated remuneration package.
Those running their own business may well be considering the payment to themselves of dividends as opp- osed to salary.
The main reason for this will, of course, be that dividends are not subject to National Insurance contributions. NICs are also due to increase from April providing more reason to review remuneration strategy.
From April 6, the self employed will pay contributions to personal pensions (but not 226s) net instead of gross.
This is an ideal time to review their current level of contributions. If they agree to continue to pay the same contribution as now, then this will be grossed up with basic-rate tax relief, effectively resulting in an increased contribution.
Pensions for all
The rules for the new defined-contribution regime from April 6 will allow many more people to invest in a pension, including those with no earned income, children and retired investors up to the age of 75.
Even if they pay no income tax, their contribution to a personal pension or stakeholder will qualify for basic-rate tax relief to be added, thus increasing their investment.
A pension for a new-born child could be funded using child benefit while pensioners can benefit even if they have no earned income. Investment income or income taken from an income drawdown plan can now be recycled back into a pension plan to get tax relief.
The spouse is back
The new rules will also mean additional opportunities for pension planning for spouses.
First, £163.3,600 a year gross can be invested in a personal pension or stakeholder without the need to employ them as no earnings are required to contribute this amount.
Second, by paying them just above the lower earnings limit (£163.3,744 in 2001/02) means they qualify for the State Second Pension which comes in from 2002 for a minimal NIC contribution.
Third, they could be paid a high salary for one year to justify a contribution of more than £163.3,600, then nothing the next year when the same high level of pension contributions can continue for a further five years.
Fourth, some spouses in the past were paid a low salary to avoid tax and NIC and have a fully funded EPP. Under the new concurrency rules, provided they are not controlling directors, they will be able to pay an extra £163.3,600 into a personal pension or stakeholder which will not be taken into account in working out maximum permissible benefits.
Personal pensions versus AVCs
Similarly, those in occupational schemes within the new concurrency rules, could be better making an AVC using a personal pension or stakeholder as 25 per cent tax-free cash is available on retirement.
This means those who can afford it could pay up to 15 per cent into an AVC and £163.3,600 into a personal pension and the icing on the cake is that the personal pension would not be a retained benefit, meaning these people can have a full two-thirds pension from the occupational scheme plus a £163.3,600 a year personal pension as well.
Finally, the simplest idea of the new regime.
The new £163.3,600 contribution allowance for personal pensions/stakeholder means that many clients will be able to increase their pers-onal pension contributions to this level.
The next few months are set to provide IFAs with many opportunities in the individual pension market starting now.