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Turning over a new relief

From April 6 next year, the eight UK pension regimes will be replaced by a single regime.

Contributions to a registered pension scheme from individuals and employers will be unlimited. However, tax relief is limited and pension schemes may choose to refund contribu-tions that do not qualify for tax relief.

For the purpose of tax relief on personal contrib- utions, people will fall into one of the following groups:

  • Individuals with earnings chargeable to UK tax, or who are UK-resident.
  • Non-resident individuals who do not have UK earnings
  • Non-resident individuals who do not have UK earnings but were in the first group within the last five years and who were resident in the UK when they became members of the scheme.
  • For those falling into the first group, tax relief on personal contributions will be limited to the highest of 3,600 or 100 per cent of earnings. Contributions that are paid under the relief at source method will be paid net of basic-rate tax and the pension scheme admini-strator reclaims tax relief back from HMRC. Higher-rate taxpayers can claim additional tax relief through their tax return.

    People in the second group will not be entitled to any tax relief. However, foreigners will be able to save in a UK scheme for the first time.

    People in the third group will be treated the same as those in the first but will only receive tax relief on contributions up to 3,600.

    UK-based employers can make unlimited contribu-tions but if the total (employee and employer added together) exceed the annual allowance (215,000 in 2006/7), the employee must declare any excess above the annual allowance on their annual tax return. Tax is charged at a rate of 40 per cent on any excess. Tax relief on employer contri-butions will normally be given against profits charge-able to UK tax but tax relief may be restricted if the firm’s tax inspector rules that the contribution is not an allowable business expense.

    Although this new legis-lation allows membership of pension arrangements for foreigners, they may be unable to take out a UK pension plan. Providers may be reluctant or unable to provide pension plans for those resident overseas and UK advisers may find they do not have the authorisation to sell business overseas.

    Those resident overseas who have UK pension plans and are using the basis-year rule to continue their contri-butions while abroad, will need to consider what action needs to be taken at A-Day. Under the new rules, basis years can no longer be used and the amount of contri-bution entitled to tax relief may reduce.

    The new regime allows people to join an occupat- ional scheme and a personal pension at the same time. The earnings limit of 30,000 for concurrency will no longer apply. Clients who are due to move overseas should consider taking out a per-sonal pension while in the UK so they can qualify for tax relief for the first five years they become non-resident.

    Since April 2001, you could only take out pension life cover (also called pension term assurance or PTA) if an individual is also contribu-ting towards a personal or stakeholder pension. The current rules state that the cost of PTA cannot exceed 10 per cent of the pension contribution. If the contri-bution reduces, the level of pension term assurance may need to be reduce. This means that PTA is difficult to administer with few prov-iders marketing the product which means contributions are expensive.

    A-Day changes this. The new contribution limits that apply to pensions will in-clude contributions to PTAs. Clients, who had previously been unable to take out a PTA, will now be able to make use of this form of life cover and obtain the added benefit of tax relief if they fall into the first or third group.

    On death, lump sum death benefits of up to 1.5m can be paid out to a nominated beneficiary free of UK tax. These benefits will normally be outside the client’s estate for IHT purposes.

    Given that most people do not get tax relief on their life cover premiums, the potent-ial market is huge. Many PTA providers are expected to enter the UK market after A-Day. This increased com-petition will make rates more competitive.

    UK residents without earnings can also take advantage of post A-Day PTA. They can pay contributions of up to 3,600 a year.

    Anyone eligible for tax relief on their PTA contri-bution should consider this type of policy rather than normal life insurance.

    References to legislation and taxation are based on Standard Life’s understanding of law and HMRC practice and of the legislation that will apply from April 6 2006.

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