Occupational pension schemes.
Employers can set up occupational pension schemes for their employees.
Public sector schemes typically offer pension accrual of 1/80th of final remuneration for each year of service up to a maximum of 40 years plus a tax free lump sum of up to 1.5 x final remuneration.
Private sector schemes can be either final salary schemes known as defined benefit schemes or money purchase schemes known as defined contribution schemes.
Many directors of small to medium sized family businesses make use of an executive pension scheme.
Executive pension schemes are subject to occupational pension scheme rules.
Final salary schemes.
Final salary occupational pensions offer a guaranteed pension amount, usually based on salary and time served with an employer.
Typically accrual rates of 1/80th or 1/60th of pensionable salary for each year of pensionable service are found.
E.g. Fred Smith retires on a salary of £10,000pa after 20 years in a 1/60ths scheme. His pension is 20/60 x £10,000 = £3,333.
Money purchase scheme.
With a
Money Purchase occupational pension, the pension contributions are invested and the final pension is based on the investment performance of the fund. There is no guarantee.
Individual Contributions.
Individuals can contribute as much as they want although there are
limits on the amount of contributions that will receive the full
benefits of tax relief.
Any contribution that is not paid by the employer is classed as a member
contribution even if a third party has made the contribution. Tax relief
is given according to the members situation; i.e. make sure that tax
relief at source applies if the member is a non- or starting rate
taxpayer. An example of this is a grandparent paying a pension
contribution for his/her grandchild.
Employer Contributions.
Just like individual contributions, employer contributions
are also unlimited. Full tax relief will be available without limit
subject to the local inspector of taxes. However, there will be a tax
charge on the member where total contributions are above the annual
allowance.
Eligibility.
Any member of a registered pension scheme can make contributions to it.
However, to be eligible to gain tax relief, the contribution must be
made by an active scheme member who is also a relevant UK individual. To
qualify as a relevant UK individual, the scheme member must meet one of
the following criteria:
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Have relevant UK earnings chargeable to income tax
for that tax year
Is resident in the UK at some point in that tax year
Was resident in the UK at some point during the five
tax years immediately before the tax year in question
and was also resident in the UK when he/she joined
the pension scheme
Has general earnings from overseas Crown
employment subject to UK tax
Is the spouse of an individual who has, for the tax year,
general earnings from overseas Crown employment subject to
UK tax
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Annual Allowance.
Since A-Day, annual pension
contributions have a new limit attracting full tax relief. This limit is
the greater of £3,600 and 100% of salary, subject to the annual
allowance (£225,000 in the 2007/2008 tax year). Any contribution over
the annual allowance will be subject to a tax charge. We will explain
this in further detail later in this bulletin.
Lifetime Allowance.
As well as an annual allowance charge, there is a possible lifetime
allowance charge if total pension funds exceed the lifetime allowance at
when pension benefits are taken. The lifetime allowance for 2007/2008
tax year is £1.6 million rising to £1.8 million in the 2010/2011 tax year.
The lifetime allowance charge is applied to the excess over the
allowance. This can apply in two different ways or both depending on how
the excess is taken. The individual charges are;
25% if taken as income, and
55% if taken as a lump sum
It is unlikely that there will be much difference because, if someone
takes the excess as income, he will be charged income tax on top of this
tax charge, more than likely at 40%.
