Home > News > 2001 > April 2001 > Personal pension regulation changes with effect from 6 April 2001
Personal pension regulation changes with effect from 6 April 2001
Level of contributions
After 6 April 2001 you can pay contributions up to £3,600 each year (gross) even if you have no earnings.
If you are a member of an "occupational" pension scheme you can still pay contributions up to £3,600 provided
- you have not been a controlling director in the current or previous five tax years and
- you have not earnt more than £30,000 in any of the last five years.
Any contributions to the personal pension above £3,600 each year must be supported by a sufficient level of earnings in line with the current maximum contribution limits. These current limits include the £3,600 and are set out below:
| Age on 6 April |
Percentage of Net Relevant Earnings(subject to the earnings cap) |
| under 36 |
17.5 |
| 36-45 |
20 |
| 46-50 |
25 |
| 51-55 |
30 |
| 56-60 |
35 |
| 61 and over |
40 |
Earnings "year"
If you wish to pay contributions above £3,600 these must be justified by your earnings based on the relevant maximum percentages for your age. You must select a "basis" year for your earnings. This can either be the current tax year or one of the previous five tax years, providing you have relevant earnings figures.
Contributions will be calculated based on your age at the 6 April each year and your earnings in the basis year.
The earnings figure in the basis year can be used to validate contributions not only in the basis year but also in each of the following five tax years. You can change your basis year each year if your earnings increase.
If your earnings cease and you have been eligible to pay higher contributions but have no relevant earnings in the next tax year, you can continue to pay higher contributions in the current tax year and the following five tax years or until you receive relevant earnings again or become a member of an occupational pension scheme.
Payment of contributions
All contributions paid by individuals, whether employed or self-employed, must be paid net after 6 April 2001. We will reclaim the basic rate tax relief from the Inland Revenue on a monthly basis. Any higher tax relief will need to be reclaimed by completing your self-assessment return.
Any contributions paid by the company on your behalf will continue to be paid gross.
Contributions should be paid by the member but can be accepted from another individual on the member's behalf provided they are made aware of the payment.
Carry back
If contributions are to be treated as if they have been paid in the previous tax year, the payment must be made between 6 April and 31 January and the election to carry back made at or before payment.
Carry forward
Carry forward of unused pension relief is abolished from 6 April 2001. However, it is still possible for a short while to utilise the carry forward provisions provided this is used in conjunction with carry back and contributions are paid before 31 January 2002. After this date it will not be possible to use the carry forward provisions.
Evidence of earnings
If you wish to pay contributions up to £3,600 per annum no evidence of earnings is required. For contributions above this amount evidence will be required of the earnings in the basis year selected. No new evidence of earnings will be required until a new basis year is selected.
Evidence of earnings must be supplied within 30 days of payment of the contribution above the minimum amount. This can be any of the following:
For employees:
- a copy of a week 52 payslip or
- P60 showing relevant earnings for the basis year or
- a declaration from your employer stipulating the amount of remuneration paid in the basis year
- a copy of the self assessment included in your income tax return for the basis year.
For the self-employed:
- a copy of the accounts for the basis year or
- a copy of the income tax return or self assessment return for the basis year or
- a written statement from your accountant, solicitor or auditor.
Overseas
If you move overseas you can still pay contributions to your personal pension of £3,600 each year provided "you are resident or ordinarily in the UK at some time in the relevant tax year or have been at some time in the previous 5 tax years".
If you have earnings taxable in the UK you can contribute in excess of £3,600 each year in line with the maximum limits outlined above.
Term assurance
From 6 April 2001 the maximum contribution which can be paid towards the cost of term assurance is restricted to 10% of the total amount of contributions paid in the tax year. This amount forms part of the total contributions paid.
If you already pay contributions to a term assurance contract started before 6 April 2001 this may continue up to a maximum of 5% of your earnings. This amount should be included in your total contributions limit.
Income drawdown
It is now possible to transfer between personal pensions when in income drawdown provided both personal pension scheme rules allow this. Income must continue to be drawn down and no new contributions can be paid. New minimum and maximum limits will be calculated at the date of transfer.
For those of you who have selected phased retirement, it is now possible to have one triennial review date for all pension benefits in payment. The review date will be three years from the date the first benefits were taken. The new limits must be calculated within 60 days of the review date.
Changes to investments
Finally changes have been made to the permitted investments. In particular a restriction has been introduced on the borrowing allowed by a SIPP.
The maximum amount which can be borrowed for the purchase or development of commercial property is "75% of the purchase price or the cost of the refurbishment".
Borrowing will not be permitted for any other investment and can be secured on any asset in the SIPP.
In addition to the maximum amount specified above, it is also possible to borrow an additional amount to cover any VAT liability. This must be repaid within 12 weeks and may mean future VAT returns being submitted on a monthly basis. These borrowing payments may be unsecured.
If you have any questions about the changes please call
Julia Bassett or Claire Morley at the
Cheltenham office.
Julia Bassett, April 2001.