Personal Pensions, Stakeholder Pensions and Self Invested Personal Pensions are written under the same legislation for individual pensions.
The value of any fund transferred together with any contributions being paid and the tax relief, which the insurer will reclaim from HM Revenue & Customs (HMRC) will be invested in a fund which grows free of tax on its investment income (except for tax deducted from UK dividends) and capital gains thus enhancing the effective return to a significant degree.
Under current legislation personal contributions to any individual pension are made net of basic rate income tax relief. The pension provider reclaims the income tax relief direct from the Inland Revenue and the total gross equivalent is invested into your pension, i.e. for a cost of 80p, £1.00 is invested. Where higher or additional rate tax relief is available, this will be reclaimed from the Inland Revenue, i.e. a further 20p or 30p in the example above (2012/2013). This is done either by way of an adjustment to your tax code or annual assessment.
The annual allowance is £50,000 per annum and contributions in excess of this will trigger an annual allowance tax charge.
Unused annual allowance from the previous three tax years can be carried forward to the current tax year. This can allow pension provision valued above the standard annual allowance to be made in a tax year without triggering an annual allowance tax charge. It is only possible to do this once the current year’s annual allowance has been fully used up, unused allowance from the earliest tax year will be used first, for tax year’s 2009/10 and 2010/11 the annual allowance is deemed to be £50,000.
Tax treatment of contributions within the annual allowance
- Members can contribute the higher of £3,600 and 100% of “UK Relevant Earnings”.
- Personal contributions receive tax relief at an individual’s highest marginal rate.* Basic rate tax relief is given at source. Higher and additional rate relief, where applicable, is reclaimed by an adjustment to the individual’s tax code or through their annual tax assessment.
- The employer contribution is unlimited but is subject to HMRC accepting that it is a justifiable business expense. This will be the responsibility of each Local Inspector of Taxes.
There are various occasions when a person’s pension benefits have to be tested against (and will use up part of) their lifetime allowance. These are known as benefit crystallisation events and they most commonly occur when a pension benefit starts to be paid or where a lump sum benefit is paid. If the crystallised value is more than the remaining lifetime allowance available, a lifetime allowance tax charge applies to the excess amount.
For the tax year commencing 6th April 2012 this is set at £1.5 million with subsequent years allowances being no lower than that for the preceding year.
Primary, Enhanced and Fixed Protection
Some individuals may have an increased lifetime allowance where they hold one of the following protection certificates.
- Primary Protection – protection is given to the value of pre “A” day pension rights and benefits in excess of £1.5 million. The pre A-Day value will be indexed in parallel with the indexation of the statutory lifetime allowance up to the date that benefits are taken. It is however possible to accrue “Relevant Benefit Accrual” post A-Day. To be able to elect for Primary Protection, an individual’s A-Day value must have exceeded £1.5m
- Enhanced Protection – this was available to individuals who ceased all “Relevant Benefit Accrual” after the 5th April 2006. There is no requirement for the “A” Day value of their benefits to have been greater than £1.5m.
- Fixed Protection – those who have registered for fixed protection will have a personal lifetime allowance of £ 1.8 million until such time that the standard lifetime allowance increases above this. No further benefit accrual is allowed after 5th April 2012 or “fixed protection” is lost.
Tax free cash lump sum
It is possible to receive up to 25% of the capital value of the pension up to the statutory Lifetime Allowance to be taken as a tax free lump sum otherwise known as the Pension Commencement Lumps Sum (PCLS). This will include plans where the contributions relate to contracting out of the State Second Pension or equivalent.
The remainder of the fund must be utilised to provide a pension income including drawing down income from your fund or choosing from a range of different types of annuity.
There is no requirement to annuitise at any time and there are no specific rules governing the maximum amount of pension that can be paid. However, pensions must be paid at least annually and PAYE must be operated.
The retirement income can be provided in one of four ways: -
- Scheme pension – this is income provided by a pension scheme, or where the pension is payable by an insurance company selected by the scheme administrator.
- Lifetime annuity – this is an annuity payable by an insurance company which the scheme member has the opportunity to choose. It is payable until the member’s death or until the later of the member’s death and the end of a guaranteed period, not exceeding 10 years.
- Capped Drawdown-this allows for your pension fund to remain invested and to drawdown an income from the fund
- Flexible Drawdown – this will allow income to be taken with no limit (effectively allowing the whole fund to be stripped out). This is on the basis that an individual can meet a ‘Minimum Income Requirement’ of £20,000 a year accumulated from other pensions (including basic state pensions, and scheme pension/dependants pensions)
On death before age 75 and before any benefits are taken, death benefits remain tax free up to the lifetime allowance limit.
Self Invested Personal Pension (SIPPs)
The types of investment you are able to hold within a SIPP are wider than under either personal or stakeholder pension plans and include; stocks and shares quoted in the UK and overseas, unquoted shares, unit trusts, investment trusts and open ended investment companies, commercial property, traded endowment policies and the use of discretionary fund managers.