Pensions - plan ahead - don’t take a chance on your future!
There are many opportunities for pension planning but the rules can be complicated. Furthermore the government plans to change the rules on the taxation of pensions very significantly from April 2006. We will of course keep you informed of the detail of the changes but in the meantime if you want to discuss pension planning further please talk to us.
Pensions have received a particularly bad press in recent times for a variety of reasons. However the tax relief on pension contributions, still at 40% for a higher rate taxpayer, is attractive. Pension planning therefore forms an important part of a year end tax planning review.
Employees who are members of a company pension scheme attract tax relief on additional voluntary contributions to the extent that, together with the employee’s other contributions, they do not exceed 15% of remuneration.
The self-employed or those in non-pensionable employment obtain tax relief for payments under personal pension contracts (PPCs). Individuals can contribute £3,600 (gross) per year with no link to earnings. This makes it possible for non-earning spouses and children to make substantial contributions to pension schemes. Further contributions can be made depending on age and earnings levels, generally referred to as net relevant earnings (NRE).
Furthermore the NRE of a particularly good year can be used as the basis of contributions for that year and the next five. If NRE increases in future years, a new base year can be notified to the pension provider.
If an individual stops work, goes abroad or retires, they have no NRE. This has previously meant that no further PPCs could be made. However where an individual ceases to have NRE, they can look at the year of cessation or any of the previous five years and select the best NRE figure. This can then be used as the NRE figure for the five years after cessation.
Different rules apply to those paying old style ‘retirement annuity premiums’ under policies that started before 1 August 1988.
Family company directors should consider making additional employer’s contributions to existing company pension schemes. If a spouse is employed by the company, consider including them in the company pension scheme or setting up such a scheme for the purpose. Even where salary levels are modest, such a scheme can provide significant benefits.
Remember that pension funds can no longer reclaim dividend tax credits. There may be a case for making extra contributions to compensate for the potential loss of income.
Also consider FURBS (Funded Unapproved Retirement Benefit Schemes), particularly if you wish to provide top-up pension benefits in excess of the maximum limits allowed for approved schemes.
