Pensions concurrency is often ignored or misunderstood. Martyn Nethercott highlights the issues and the opportunities
Among the most welcome aspects of stakeholder pensions was the introduction of pensions concurrency that allows members of an occupational pension scheme to make additional contributions to a stakeholder or personal pension. There is a high degree of confusion in the marketplace as to exactly who is eligible and exactly how big an opportunity this really presents. What I will try to do in this article is add some clarity and size up the opportunities that now exist.
Now that the dust is starting to settle following all the stakeholder hype, it is becoming obvious that stakeholder pensions will risk missing their intended target market. Those on lower incomes are more likely to have other pressing financial priorities and there are also the concerns about the Minimum Income Guarantee. What is becoming clear is that the new integrated defined contribution regime opens up a number of new retirement planning opportunities for other non-targeted segments of the population.
One of those key segments is the members of an occupational pension scheme, who are now able to also make concurrent contributions of up to £3,600 a year to a stakeholder pension or personal pension. Given the attraction of stakeholder and mono-charge personal pensions, with low charges and tax-free cash, it is worth seizing the opportunity.
With only one in five people retiring on an income of two-thirds of final salary, there is considerable scope for additional pension funding. An extra eight million people will be able to pay into stakeholder pensions ' nine out of 10 occupational pension scheme members, according to the DSS. Can more individuals be persuaded to top up their retirement savings?
Around 17% of scheme members (well over one million individuals) make additional voluntary contributions (AVCs). With Inland Revenue figures showing that 89% of the UK tax-paying population earn less than £30,000, are those currently making AVCs paying into the most suitable type of plan?
The answer to these questions may not be clear cut and, because of the added complexity, advice will be a key requirement. A good understanding of the regulations will be essential to making the right recommendation. It is worth reminding ourselves of the main details.
The maximum concurrent contribution a member of an occupational pension scheme can make, in addition to their contribution to the main scheme, is £3,600 a year gross of tax (£2,808 net). These can be made to a stakeholder pension or a personal pension.
Not all members of an occupational pension scheme will be allowed to contribute. They will only be eligible provided that:
They have not been a controlling (20% interest for these purposes) company director in the year in question or in any of the preceding five tax years (tax years prior to 2000/2001 are not relevant)
They had P60 earnings of less than £30,000 a year in any one of the five tax years preceding the year in question (again tax years before 2000/2001 are not relevant).
Important points to note are, first, that personal pensions as well as stakeholder can be utilised. This may be particularly important for individuals who want access to genuine with-profits funds.
Second, it is P60 earnings and not total earnings that are used in establishing eligibility to make concurrent contributions. P60 earnings exclude P11D benefits and 'net pay' pension contributions (excludes FSAVCs).
For example, an individual with total earnings of £35,294 who is making pension contributions of 15% (£5294.10) would have P60 earnings of £29,999.90 and would be eligible to make concurrent contributions.
There will inevitably be individuals whose P60 earnings go above the £30,000 limit. Fortunately there is a fair degree of flexibility. Concurrent contributions of up to £3,600 can continue during the tax year in question and for the next four tax years. However, as soon as the individual becomes a controlling director, concurrent contributions must cease immediately.
There are many differences between AVCs and stakeholder/personal pensions. Without getting into the minute detail, some of the key areas are shown in the comparative table.
As can be seen from the table below, the concurrent stakeholder or personal pension option certainly has some key advantages over AVCs. The choice of product is not automatic so advice is critical. Another area to consider is the changes: is the employer paying for them, what is the investment choice and, most importantly, is there any offer of matching of contributions by the employer?
The Inland Revenue is currently carrying out a pensions review in which the outstanding issues include consideration of tax-free cash on AVCs. While no decisions have yet been made, intermediaries should be aware of the impact this may have.
These are all issues that would need to be considered as part of the advice process. There are some key actions advisers can now take by way of adding value for clients who are members of an occupational pension scheme: review those who currently make no additional pension provision and explain the new options.
For those who already pay AVCs or Free Standing AVCs, advisers should assess if this is still the most suitable vehicle or whether a concurrent stakeholder or personal pension is more suitable. Are there individuals who pay maximum contributions (15%) to their occupational scheme who can now pay additional concurrent contributions?
Employees able to take tax free cash from a stakeholder or personal pension from age 50 which is not normally possible for AVCs or FSAVCs
Benefits from concurrent contributions will not count towards Inland Revenue limits.
The maximum earnings salary for eligibility for concurrent contributions is based on P60 earnings and not total earnings.
Employers can pay concurrent contributions.
Opportunity for IFAs to review existing clients top up arrangements.
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