Significant changes to pensions were announced in a Department of Social Security (DSS) press releas...
Significant changes to pensions were announced in a Department of Social Security (DSS) press release at the end of February. It gave details of the tax regime for stakeholder pensions, with Alistair Darling, Secretary of State for Social Security, saying: "We are radically simplifying the tax regime for stakeholder and personal pensions."
The release announced further details of the proposed changes that will apply to the tax regime for stakeholder and personal pensions. In line with earlier proposals it has been decided that the carry forward of unused relief will be abolished from April 2001. The view is that this facility will no longer be needed by the vast majority of individuals because they will be able to make a payment of up to £3,600 a year without reference to earnings. It is worth noting, however, that the complex carry forward rules are likely to continue for contributions to S226s.
Carry back will remain. But the rules regarding the timing of the payment and making the election to carry back will change. New arrangements will be introduced after April 2001. After that date, if carry back is required, the payment will have to be made before 31 January (the deadline for filing a self-assessment tax return), and an election to carry back must be made at the same time as the payment or earlier.
Under the current rules a contribution can be made as late as 5 April (the last day of the tax year) and a decision as to whether or not to carry back can be made at any time up to the 31 January in the tax year after the contribution is made.
But for the 2001/2002 tax year, if a contribution is to be made and treated for tax purposes as though it was paid in 2000/2001, that is carried back, the contribution will need to be paid by no later than 31 January 2002 with the election to carry back also made no later than the contribution payment date.
Where clients have old-style retirement annuity contracts (S226s) and are also contributing to personal pension plans (PPPs), the interaction between the two will be anything but radically simplified and instead be far more complex. Every contribution will need to be considered carefully.
Any client who makes a contribution to a PPP immediately invokes the PPP cap on the total contributions to S226s and PPPs. The cap can be removed by electing to carry back any PPP contribution to the previous year. This action would then mean that no PPP contribution is treated as paid in the current year and hence the PPP cap would not apply (although care is needed as the cap will obviously now apply to the previous year, if it did not already). The following example provides an illustration:
Peter has both an S226 policy and a PPP. He has been contributing to both over recent years but nowhere near his contribution limit. Should he wish to make higher contributions he will carry back the PPP contribution made in 1999/00 to 1998/99 which will then 'empty' the year of PPP contributions and remove any cap.
Peter inherits money in 1999/00 and wishes to use some of his new-found wealth to make maximum contributions to his pension plans. Peter, who makes his contributions in May every year, requests that his 1999/00 PPP contribution is carried back to 1998/99 and then makes the maximum S226 contribution together with any unused S226 relief carried forward.
The benefits of carrying back PPP contributions in this way are:
l If a client with high earnings has, by mistake, taken out a PPP without realising that it brings the S226 into the earnings cap, he/she will be able to bring forward the unused S226 relief to make the contribution to the maximum allowed.
l If a client wants to build a fund up under both S226 and PPP, this will enable him/her to take some benefits at 50 from the PPP, while still paying maximum contributions into the S226.
An important point is that any contract the client has must be as flexible as possible with a stop/start facility on contributions being an important feature.
In future, Peter's actions will need to be more hurried because it will not be possible to delay the decision on whether or not to carry back. It will have to be made immediately and the contribution will need to be made before 31 January. In the previous example, the problem for Peter is that in the past he would have had plenty of time to spot any error.
A S226 contribution could have been made as late as 5 April with a decision at the same time to carry back the May PPP contribution. But, after the changes, if Peter should make a contribution in May and not elect at the same time to carry back, then he would substantially reduce the potential for S226 contributions.
With the proposed reduction in basic rate tax from 23% to 22% it is very likely that carry back will be used more often than it is currently. Many new clients are likely to be introduced to the concept of carry back in 2000/01 and will be raising the subject again in 2001/02.
From a self-employed person's point of view it is difficult to envisage many situations when carry back will not make sense. It gives the ability to obtain quicker tax relief, make larger future contributions by keeping the current year 'empty' and perhaps also the benefit of greater tax relief.
But there may be confusion for individuals who pay monthly contributions and wish to carry back. They will need either to make a carry back decision at the same time as each contribution (a situation which is unlikely to make anyone involved happy) or make a decision at the beginning of the tax year that they wish to carry back a certain level of contribution.
Unfortunately they will need to have explained to them that the contributions paid in February and March (and April if paid before the fifth of the month) cannot be carried back. Will this mean that monthly paid plans will be redesigned to accept only 10/nine monthly payments a year
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