Before 6 April 2001, if a person had not contributed the maximum permissible to a pension plan in an...
Before 6 April 2001, if a person had not contributed the maximum permissible to a pension plan in any of the immediately preceding six tax years, paying a maximum contribution in the current year allowed them to pay further contributions in respect of this unused relief for these six years. (see case study: Alf)
The carry-back rules have been amended in respect of any contribution paid on or after 6 April 2001. Under the new rules, a contribution that is to be carried back to the previous tax year must be made by no later than 31 January following the end of the tax year to which it is to be carried back. The carry-back election must also be made no later than the date when the contribution to be carried back is paid. (see case studies: Sally and Andrea)
Another new rule permits a person to continue paying 'higher level contributions' for up to five tax years following the year in which he/she ceased to have relevant earnings. To do so however, they must not be a member of an occupational pension scheme or have any relevant earnings in those years.
In any event, a person can contribute £3,600 gross per tax year and so this is only a significant benefit if the earnings of the previous tax year support a higher contribution than £3,600.
When determining the net relevant earnings on which the member's continued contributions can be based, the earnings for the tax year in which the member's relevant earnings ceased, or the earnings for any of the five tax years immediately prior to that tax year, may be used. This means any of the six tax years for which the member has already provided evidence of earnings or can now provide evidence of earnings.
If this new rule can be used in conjunction with the five-year continuation rule, it could mean in an extreme case that the 'evidenced' net relevant earnings in respect of one tax year could be used to justify 'higher level contributions' for up to 11 tax years. (see case study: Charles)
Concurrent membership with occupational scheme
Partial concurrency represents a massive change from the previous rules that applied to pensions. What it means is that an individual who is a member of an occupational pension scheme throughout a tax year will now be able to pay up to £3,600 gross each tax year to a DC tax rules scheme while continuing as a member of the occupational scheme. In order to do so, they must:
• Not have been a controlling director of a company either in the tax year when joining the DC tax rules scheme or in any of the five preceding tax years. For this purpose, tax years prior to 2000/01 will not be taken into account
• Have had earnings from pensionable employment for at least one of the five previous tax years of no more than the remuneration limit of £30,000. For this purpose, an individual will not be able to use earnings from a tax year prior to 2000/01. Where an employee has not been employed for a full tax year, earnings will be grossed up to take account of this.
Before members can make a partial concurrency contribution, they must provide the scheme administrator of the DC tax rules scheme with a certificate that:
• Identifies the qualifying year ' the tax year the member is selecting where earnings are no more than the remuneration limit.
• Confirms earnings in the qualifying year are no more than the remuneration limit.
• Confirms total contributions will not exceed £3,600 gross.
• Gives the full name and address of any person who pays the individual remuneration from an employment where the individual is a member of an occupational pension scheme.
Once a qualifying year has been nominated in this certificate, contributions of up to £3,600 gross can be made for the five tax years that immediately succeed the qualifying year. These are known as the certificated years.
This means that an individual wishing to take advantage of partial concurrency in tax year 2001/02 would need to have earnings of £30,000 or less in tax year 2000/01. This would become their qualifying year and would enable contributions of up to £3,600 gross to be paid in tax years 2001/02-2005/06.
Such contributions could continue to be paid even if the employee's earnings in any one or more of those tax years exceeded £30,000. (see case study: Dave)
However, if the employee became a controlling director in any of these tax years, contributions under the partial concurrency provisions would have to stop immediately.
Members of DC tax rules schemes who are resident outside the UK are still eligible to contribute to a scheme during a tax year in which they have actual net relevant earnings.
They may contribute up to the higher of £3,600 gross and the amount based on the relevant percentage of their net relevant earnings.
Where appropriate, contributions may be based on evidenced net relevant earnings as determined under the five-year continuation rule and/or under the ability to pay contributions in years after earnings.
A member of a DC tax rules scheme who is resident outside the UK and has no net relevant earnings in a tax year is still able to contribute to the scheme if one of the following apply:
• At some time in the tax year, they are resident and ordinarily resident in the UK
• At some time in the five tax years preceding the one in question, they have been resident and ordinarily resident in the UK and were resident and ordinarily resident in the UK when joining the DC tax rules scheme. (see case study: Arnold).
• Carry back rules have been amended in respect of any contribution paid on or after 6 April 2001.
• Partial concurrency represents a massive change from previous pension rules.
• Members of DC tax rules schemes who are residents outside the UK can contribute to a scheme during a tax year in which they have net relevant earnings.
Case study: Alf
While Alf could have paid £3,000 gross to a pension plan in each of the six tax years immediately preceding tax year 2000/01, he had only paid £2,000 in each of those years. For each tax year he had unused relief of £1,000 and so could have paid a gross contribution of £9,000 (the £3,000 maximum for tax year 2000/01 plus the £6,000 total carried forward relief).
Under the new stakeholder rules, carry forward of unused relief was abolished from 6 April 2001. However, it is still possible for a contribution paid between 6 April 2001 and 31 January 2002 to be carried back to tax year 2000/01. This enables a member to take advantage of the existing carry-forward rules by picking up unused relief in the six tax years immediately preceding tax year 2000/01.
In the Inland Revenue's view, there is no longer a need for carry-forward as people will be able:
• To contribute up to £3,600 gross in each tax year irrespective of earnings
• To continue 'higher level contributions' for up to five tax years after the tax year in which they cease to have relevant earnings
• To use the evidenced net relevant earnings of one tax year as the basis for higher level contributions over the following five tax years.
Case study: Sally
Sally pays a contribution on 1 September 2001, between 6 April 2001 and 31 January 2002. She must make the election to carry the contribution back to tax year 2000/01 by no later than the date the contribution was actually paid - as the contribution was actually paid on 1 September 2001, the carry-back election would have to be made on or before that date.
Although carry-forward was abolished from 6 April 2001, it is still possible to take advantage of carry-forward where a contribution paid between 6 April 2001 and 31 January 2002 is carried back to tax year 2000/01.
Case study: Andrea
Andrea, who is 48, had earnings of £40,000 tax year 2000/01 and paid a personal pension contribution of £5,000 in that tax year. She has unused tax relief of £7,000 in respect of tax years 1994/95 to 1999/2000.
On 1 September 2001, Andrea could pay a gross pension contribution of £12,000 and at the same time, elect to carry this back to tax year 2000/01.
Of the contribution, £5,000 is used to maximise Andrea's contribution for tax year 2000/01 and the balance to pick up her £7,000 of unused relief for tax years 1994/95 to 1999/2000.
Tax relief on the carried back contribution will be available in tax year 2000/01.
Case study: Charles
Charles starts a stakeholder pension on 1 October 2002. In tax year 2003/04, he pays a gross contribution of £5,000 based on his earnings of £25,000. He provides suitable evidence of such earnings to the scheme provider. This means that despite having reduced net relevant earnings of only £10,000 in subsequent tax years, he can base his stakeholder pension contributions on net relevant earnings of £25,000 for each of the next five tax years.
Let us assume that Charles is made redundant on 1 April 2009, receiving a lump-sum redundancy payment of £75,000. Under the new rules, providing he has no relevant earnings in the next five tax years, he could pay a contribution based on net relevant earnings of £25,000 into a pension plan in each of those years. He would also be eligible for tax relief even though he then has no relevant earnings in those tax years.
Case study: Dave
Dave, aged 36, is a member of the Walltight Widget money purchase occupational scheme. He pays an employee contribution of 7% of his earnings, which have never exceeded £28,500. Although he is employed and a member of an occupational pension scheme, he can also contribute to a stakeholder (DC) pension from 6 April 2001 and decides to invest £150 gross per month (£1,800 gross per annum). He thinks this will give him more flexibility over pension provision, particularly in the important area of tax-free cash.
Case study: Arnold
Arnold had net relevant earnings of £50,000 from Winterhot Ltd in tax year 2000/01. Under the terms of the five-year contribution rule, he is able to choose to treat tax year 2000/01 as his basis year and use his net relevant earnings of £50,000 as the basis for his contributions in tax years 200l/02 to 2005/06 inclusive.
As Arnold was aged 34 at the beginning of tax year 2001/02, he is able to pay the following contributions.
Tax years Max gross contributions
2001/02 and 2002/03 £8,750
His contribution increases to maximum of £10,000 for tax years 2003/04-2005/06 inclusive as he is aged 36 or more from the beginning of tax year 2003/04. This enables him to contribute a maximum of 20%, rather than 17.5% of his net relevant earnings.
Lisa used as 'top-up'
Two FCA consultation papers
UK's poorest retirees most affected
'5% no longer the norm'