In the first in a series of articles, the David Aaron Partnership looks at the tax rules applying to DC pension sectors
The introduction of stakeholder pensions and the State Second Pension (S2P) represent the most radical changes to private and State pension provision in the UK for more than a decade. All employers, employees and the self-employed need to reappraise their pension provision in light of these changes.
The lynchpin of the changes is new tax rules that will apply to DC (defined contribution) pension schemes.
Timetable for changes
• 1 October 2000: First date stakeholder schemes could be registered with Opra.
• From 1 October 2000: Trustees of money purchase occupational schemes have been able to seek Inland Revenue approval to convert their scheme so that they come under the new tax rules.
• 6 April 2001: New tax rules introduced. First stakeholder schemes available to accept contributions.
• 8 October 2001: Date by which employers that are not exempt from the new rules must offer their employees access to a stakeholder scheme.
• 6 April 2002: Introduction of S2P.
• 6 April 2006: Estimated date of when S2P benefit accrual becomes flat rate.
All personal pensions, including those set up before 6 April 2001, will be subject to the new tax rules. This will be irrespective of whether or not they are established on a stakeholder basis. Retirement annuity policies will not be subject to these new rules but will continue to come under the current tax rules that apply to them. The new tax rules will also apply to the members of any existing money purchase occupational scheme on which the trustees have received agreement to convert to the DC tax rules.
Eligibility for these rules extends to any individual aged under 75 who is either resident and ordinarily resident in the UK, in receipt of UK taxable earnings or employed abroad on Crown duties (or where an individual is married to such a person). This is providing the individual is not a member of an occupational scheme in respect of their only employment throughout the tax year in question.
Where a child below the age of 18, a DC tax rules scheme will need to be effected on their behalf by a legal guardian. However, where a child is aged 16 or 17 and in employment or self-employment, they may set up their own scheme and a legal guardian is not required.
If an individual has more than one employment in a tax year, they may contribute to a DC tax rules scheme in respect of any employment where they are not a member of their employer's occupational scheme throughout the tax year in question.
Where an individual has been contributing to a plan subject to the new DC tax rules and becomes non-UK resident, they will be eligible to continue to contribute to the scheme.
Prior to 6 April 2001, a member of an occupational pension scheme could not be a member of a personal pension plan in respect of the same employment. However, in something of a climbdown, from 6 April 2001, the Government will permit concurrent membership of occupational and DC tax rules schemes for low and medium earners.
Up to £3,600 gross may be paid each tax year to a DC tax rules scheme. For these purposes, it does not matter whether or not an individual has earned income.
Contributions in excess of £3,600 gross may be paid in a tax year subject to these not exceeding the maximum allowed using the current age and earnings-related limits for personal pensions, including the earnings cap.
• All new person pensions, as well as those set up before 6 April 2001, will be subject to the new rules.
• Eligibility for these rules extends to anybody who is aged below 75.
• Up to £3,600 gross may be paid each year to a DC tax rules scheme whether or not the individual has earned income.
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