A cry of three cheers was the general response to the Government's announcement that employees (but ...
A cry of three cheers was the general response to the Government's announcement that employees (but not controlling directors) earning up to £30,000 a year will be able to contribute up to £3,600 a year to a personal pension or stakeholder arrangement and be a member of an occupational pension scheme at the same time. Let's look at the details.
Members of an occupational pension scheme will also be able to contribute to a personal or stakeholder pension if:
1. They satisfy the residency requirements:
2. Have not been a controlling director at any time in the preceding five tax years, and
3. Their remuneration was not more than £30,000 in at least one of the preceding five tax years, and
4. Their total contributions to all personal pension/stakeholder arrangements do not exceed £3,600 per year
When looking at whether they were not a controlling director at any time in the preceding five tax years or whether their earnings were not more than £30,000 in at least one of the preceding five tax years, we cannot go back to years before 2000/01.
The Treasury could change the £30,000 threshold in the future but there has been no indication that this will happen.
The £3,600 limit includes contributions made by the member and the member's employer to all personal and stakeholder pension arrangements. Employer contributions and member contributions to occupational schemes, AVCs and FSAVCs do not count towards the £3,600 limit and can be made in addition.
A certificate of eligibility will be required:
i identifying the qualifying year (any one of the five immediately preceding tax years, but not before 2000/01, where remuneration was not more than £30,000),
ii certifying that in the above qualifying year, remuneration was not more than £30,000,
iii certifying that total contributions to all personal/stakeholder pensions will not exceed £3,600 each year,
iv stating full name and address of all employers who provide the member with an occupational pension scheme.
A certificate is required only when a member of an occupational pension scheme first pays a personal/stakeholder pension contribution and every five years after the qualifying year stated in the previous certificate.
Further good news is that the value of the personal/stakeholder pension fund will be ignored when calculating Inland Revenue limits under the occupational pension scheme. Concurrency will not be allowed with S226 retirement annuity policies.
Employees, who are not controlling directors and earning not more than £30,000, already contributing to personal/stakeholder arrangements will be able to continue their contributions (up to £3,600 per year) even if they join an occupational scheme when they become eligible or upon a change of employment.
It will be easier for employers to set up personal/stakeholder nursery schemes for employees who are not eligible to join the main occupational scheme in the knowledge that the employee can continue to contribute to the personal/stakeholder arrangement once the employee becomes eligible for membership of the main scheme.
Personal/stakeholder arrangements can be used instead of AVCs and FSAVCs. The option to take benefits from age 50 while continuing to work, without having to use drawdown and being able to take 25% tax-free cash will make personal/stakeholder arrangements more attractive than AVC and FSAVC arrangements for those earning up to £30,000.
A simplified tax regime for all defined contribution (DC) pension arrangements, including personal pensions, stakeholder pensions and money purchase occupational schemes is being introduced on 6 April 2001. Let's look at what this means for money purchase occupational schemes.
New money purchase occupational schemes can be set up under the old occupational tax regime or the new DC tax regime. Existing money purchase occupational schemes may elect to be treated, for tax purposes, as defined contribution (DC) pension schemes and use the new DC tax rules. Partial conversion will be allowed to cater for members who do not want to become subject to the new DC regime. In such cases the scheme will be split into two parts and effectively administered as two different schemes.
An occupational scheme set up under the new DC tax rules will be treated the same as a personal pension for maximum contributions and benefits:
l contributions up to £3,600 each tax year irrespective of earnings
l contributions over £3,600 based on existing personal pension age and earnings related limits which can continue for up to 5 years after earnings have ceased/reduced
l all contributions from members, will be paid net of basic rate tax. Any higher rate tax relief can be claimed through the individual's tax return
l 10% of pension contribution can be used for life assurance
l carry back available for payments made before 31 January in any tax year if election done before or at same time that the payment is made.
There will be no limit on the pension payable and the tax-free cash will be 25% of the accumulated fund. However, the scheme will still be treated as an occupational pension scheme for Pensions Act 1995 purposes and as an occupational pension scheme for contracting-out purposes.
The Inland Revenue has issued draft regulations with the catchy title The Personal Pension Schemes (Restriction on Discretion to Approve and Conversion of Retirement Benefit Schemes) Regulations 2000. These set out the requirements for existing money purchase occupational schemes converting to the new DC tax regime.
The scheme must have been valued within the last three tax years in accordance with the max
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