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The new tax rules from Stakeholder and personal pension contributions
The rules for contributions from April 2001 will be the same for both stakeholder and personal pensions. The new regime will bring in considerable changes to the contribution rules. The biggest change is that it will no longer be necessary to have earnings in order to be able to contribute to a pension arrangement. From April 2001, individuals will be able to contribute to a stakeholder or a personal pension even if they have no earnings, as long as they are resident in the UK or they are Crown employees.
- Anyone without earnings will be able to contribute up to £3,600 a year into stakeholder or personal pensions. For example, children, students or non-working spouses can contribute to pensions in their own right. Contributions can continue until age 75, even after retirement.
- The £3,600 is a gross limit before tax relief and includes any employer's contributions. However, the limit excludes any contracting out contributions.
- Grandparents: It will be possible to take out a stakeholder or personal pension for a child. The contract has to be taken out by the child's legal guardian. But another individual, such as a grandparent, can make contributions to the contract, as long as the guardian is aware of the contributions.
- Contributions of more than £3,600 a year can be made if the individual has enough earnings. The current age-related personal pension contribution rules have been extended to cover stakeholder as well. So contributions can range from 17.5% of earnings up to age 35, rising to 40% of earnings at age 61.
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| Stakeholder/personal pension maximum contributions Contributions as a percentage of net relevant earnings- |
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| Age on 06/04/01 | Percentage % |
| 35 or below | 17.5 |
| 36 - 34 | 20.0 |
| 46 - 50 | 25.0 |
| 51 - 55 | 30.0 |
| 56 - 60 | 35.0 |
| 61 - 74 | 40.0 |
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| Under the new rules, proof of earnings in any one year will allow the individual to make contributions based on those earnings for the following five years, regardless of their actual earnings during those years. If earnings rise, they can use a new basis year.
The following example shows how this would work in practice. |
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| Year | Age | Salary | Max Contribution |
| 2001/02 | 42 | £60 000 | £12 000 |
| 2002/03 | 43 | £0 | £12 000 |
| 2003/04 | 44 | £0 | £12 000 |
| 2004/05 | 45 | £0 | £12 000 |
| 2005/06 | 46 | £40 000 | £15 000 |
| 2006/07 | 47 | £40 000 | £15 000 |
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| If a person's earnings cease altogether, their contributions can continue to be based on their certified earnings for up to five years after stopping work. After that, their contributions can continue up to to the £3,600 a year limit.
The following example shows how the six year earnings certification rule and the cessation of earnings rule could be combined in practice. |
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| Year | Age | Salary | Max Contribution |
| 2001 | 47 | £80 000 | £20 000 |
| 2006 | 52 | £30 000 | £20 000 |
| 2007 | 53 | £0 | £20 000 |
| 2008 | 54 | £0 | £20 000 |
| 2009 | 55 | £0 | £20 000 |
| 2010 | 56 | £0 | £28 000 |
| 2011 | 57 | £0 | £28 000 |
| 2012 | 58 | £0 | £03 600 |
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Carry forward relief
Members normally make their stakeholder or personal pension contributions during the tax year in which their earnings arise. But if they wish, they can delay making the contribution until 31 January in the next tax year - at the latest. It will no longer be possible to carry forward unused personal pension plan relief to the tax year 2001/02 or later. In principle members who do not use their potential relief each year for that year's earnings will lose it. People who are fortunate enough to have a retirement annuity plan (the predecessor of personal pensions - available before July 1988) will be able to continue to enjoy the benefits of carry-forward. |
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Life assurance
Under the pre-April 2001 rules the maximum contribution which can be used to buy life cover is 5% of net relevant earnings. From April 2001 the maximum contribution that can be used to provide life cover will be 10% of the total pension contribution being paid. The new limit is more restrictive and will generally result in a lower level of life cover being available under a pension contract. |
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Net contributions
All personal contributions to stakeholder or personal pensions from April 2001 will be made net of basic rate tax. A person who does not pay tax, e.g. a child or a non-earner, will still receive basic rate tax relief.
This is a particularly significant change for self-employed people, because they have always paid contributions gross and reclaimed the tax relief. Under the new system, self-employed contributors will receive basic rate tax relief, even if they make a trading loss at the end of the year.
If there is any higher rate tax relief available, it will continue to be reclaimed through the individual's tax return.
Employer contributions will continue to attract corporation tax (or income tax) relief and will continue to be paid gross. |
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Occupational schemes and the new rules
Employers who have occupational pension schemes where the benefits are linked to employees' final salaries (defined benefits) may also have to make changes to their schemes to meet the various exemption criteria. This could be a good opportunity for a radical review of pension arrangements. One option might be to switch to a money purchase scheme (defined contributions) where the benefits are based on the level of funds built up in each individual's pension arrangement. |
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Moving to the new stakeholder/personal pension regime
Where an employer offers an existing money purchase scheme, the trustees of the scheme have the option of moving the scheme into the new regime. If the scheme moves into the new regime, members will no longer be subject to the existing benefit limits and, instead, the contribution limits for stakeholder and personal pensions will apply to them. |
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Warning
This is a very complex area, which will require careful consideration, because a move into the new regime could significantly change the benefits to which individual members are entitled. So employers and employees are likely to need advice.
For example, it may not be in every individual employee's interests to transfer from the final salary scheme to the new arrangement. Much will depend on individual circumstances.
This will be an important decision for the employer and scheme trustees. Transferring pension benefits is an extremely complicated area and advice will be of significant benefit in helping trustees reach the right decision. |
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Concurrent membership of more than one scheme
Individuals can be members of as many schemes as they like within the new stakeholder/personal pension regime, provided they do not exceed the contribution limits. For example, if they so wish, they could have both a stakeholder and a personal pension.
Membership of a normal occupational scheme and a stakeholder/personal pension arrangement is only permitted if the individual
- Earns less than £30,000 a year, and
- Is not a controlling director.
Employees can contribute up to 15% of their earnings to the occupational scheme and up to £3,600 a year to the stakeholder/personal pension. The benefits they build up under their stakeholder/personal pension will not count towards their Inland Revenue maximum benefits under their main scheme. |
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Additional Voluntary Contributions:
Many members could be better advised to make extra contributions to a stakeholder pension rather than make additional voluntary contributions. This is yet another area where advice has an important role to play. |
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