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Stakeholder pensions and the new defined contribution tax regime
Summary
Stakeholder pension schemes are a type of defined contribution pension arrangement to be made available from 6 April 2001. Stakeholder schemes are particularly aimed at employees who have no existing pension provision. The final detailed regulations (the Stakeholder Pension Schemes Regulations 2000) were passed in May and these describe how stakeholder schemes are to be established, operated and wound-up.
The regulations introduce requirements on employers to provide their employees with access to a "designated" stakeholder scheme from 8 October 2001, although there is no requirement for employers to contribute to this scheme on their employees' behalf. Some employers will be exempt from providing access for its employees to a stakeholder scheme. These exemptions are discussed more fully in our summaries of the regulation: [Summary guide] [Detailed guide].
The new tax regime
Now we have the detailed regulations in place the next part of the jigsaw to be put into place is the new 'stakeholder' tax regime which we have only seen in draft form so far in the Finance Bill 2000. The new regime will cover all stakeholder pensions as well as personal pensions (including Group Personal Pensions). The idea is that the advent of stakeholder pensions will "herald a new simplified and integrated tax regime for defined contribution schemes". There will be a one-off opportunity for existing occupational money purchase schemes to convert from the current tax regime to the new regime. Some features of the proposed new regime are as follows:
- Limits on contributions, not benefits.
- Contributions of up to £3,600 will be allowed each year with no reference to earnings. Above this, the maximum contributions will be based on the current personal pension age-related scale (that is 17.5% of net relevant earnings up to age 35 rising to 40% at age 60). Any contributions above £3,600 will need to be supported by earnings.
- Contributions will be able to be paid for 5 years after earnings have ceased.
- Contributions will be payable net of basic rate income tax. The provider will reclaim the basic rate tax relief from the Inland Revenue (higher rate tax will be reclaimed via the individual's tax return).
- The current 'carry forward' rule (where unused tax relief is carried over to future years) is to be abolished and the 'carry back' rule (where a contribution can be counted for tax purposes as being paid in the previous tax year) is going to be amended. This is intended to make the system easier to understand although some people whose earnings are unpredictable (for example the self-employed) may be worse off under the new rules.
- 25% of the accumulated fund can be taken as tax-free cash.
- Concurrent membership of both a stakeholder and an occupational scheme allowed for employees earning under £30,000 pa.
The coming year
The next year will prove to be a busy and challenging time for everyone involved in pensions, advisers and employers. Many employers who have never offered pension arrangements to its employees before will now have to consider their strategy. Providing access to a stakeholder will be the bare minimum required to comply with the regulations. It will be interesting to see how many employers use this opportunity to provide more than the minimum, perhaps through making employer contributions. Many employers who do currently have pension arrangements will equally have to consider whether their current scheme makes them exempt from providing a stakeholder scheme. Many occupational schemes will need to have their rules amended in order to make the employer exempt from providing a stakeholder scheme, and Barnett Waddingham is well placed to advise on future pensions strategy.
Longer term success
The longer term success of stakeholder pensions will ultimately depend on the level of take-up by employees. The government's aim has been to provide low cost pensions for more people and to make pensions more simple as a whole. There is a danger though that stakeholder and the new tax regime will just add more options to what is already a complicated area for the public.
Barnett Waddingham, August 2000