TT13: Pension Planning
An important pension planning matter is dealt with in this issue of Topical Tips. It is of great significance to the self-employed and individuals in nonpensionable employment who fund their pension by contributing to a Personal Pension Plan. It is, however, not relevant to individuals in a company pension scheme (often called an Executive Pension Plan) – but beware, some schemes have the appearance of being company pension schemes when in fact they have been established as Group Personal Pension Plans.
Such schemes may look and feel like a company scheme, but for tax purposes they are treated as any other Personal Pension Plan.
So what’s so important? Under Personal Pension legislation, the maximum amount that can be contributed to the scheme is an age related percentage of relevant earnings (as defined). A long recognised problem is that often people cannot afford to pay the maximum amount year on year, especially when they are younger. A rule to ameliorate this problem was devised under which unused entitlement could be carried forward to be used in any of the six succeeding years, assuming funds were available.
Unfortunately, the Government abolished this carry forward provision with effect from 6 April 2001, the result being that earlier years’ unused relief cannot be utilised after the 2000/01 tax year.
A solution – but use it or lose it
However, all is not yet lost. There is another rule, known as carry back, under which a Personal Pension premium paid by 31 January in a tax year can be treated as if it had been paid in the previous tax year. Thus, a Personal Pension premium paid now can be treated as if it had been paid in 2000/01 and relieved accordingly. As a consequence, if there is unused tax relief for the tax years 1994/95 to 1999/2000, this unused relief can be carried forward to 2000/01 and utilised by a premium paid by 31 January 2002 that is dealt with under the carry back rules.
Time is of the essence. To take advantage of these rules, the amount of any unused relief must be calculated and then the Personal Pension premium and the election to carry the premium back must be made by 31 January 2002. After that date, it will not be possible to utilise unused relief under the carry forward rules.
Barnes Roffe Topical Tips
- This is a last opportunity to take advantage of unused pension entitlement for the tax years 1994/95 to 1999/2000.
- It is vital that the amount of any such unused relief is quantified as quickly as possible.
- It is also vital that the tax saving to be gained from paying a large, oneoff pension contribution is quantified. The cost could be reduced by as much as 40%, but if the relief is small, it might make the exercise unattractive.
- Any premium and the carry back election must be made by 31 January 2002.