CONCURRENCY EXPLAINED
by Steve Taylor

After 31 January - pensions payment time, the new dilemma

Now the 31 January deadline has passed, the next important deadline for personal pensions is 5 April 2001. It is important to take action regarding carry back/carry forward before the end of this tax year, as the rules for carry back/carry forward (amongst others) for personal pensions are changing. However, waiting until after 5 April also deserves careful consideration - as will be explained later.

The changes to carry back/carry forward

The changes for carry forward mean that 2000/01 is the last tax year in which it can be used. Carry back changes are a little more detailed. From 2001/02 onwards carry back will only be allowed if the contribution is paid before 31 January in a tax year and the decision to carry back is made at the same time as making the contribution (or earlier).

The combination of carry back/carry forward will mean that a contribution paid in 2001/02 can be carried back to 2000/01. If 2000/01 is the base year then carry forward can still be taken advantage of. This means that the absolute deadline for using carry forward is 31 January 2002 (provided of course that the contribution paid is carried back).

The 6 April deadline?

Consider a higher rate tax paying self employed individual planning to contribute just before the end of the tax year on 5 April 2001 and not wishing to carry back (perhaps due to lower earnings last year). Relief at 40% will be obtained by having a lower balancing payment on 31 January 2002 - a wait of nine months. Alternatively a contribution could be paid on say 6 April and this time carried back. Because the contribution is paid in 2001/02 this must be paid net of basic rate tax - even if paid by someone who is self employed. The rest of the tax relief would be obtained as an offset against the balancing payment due on 31 January 2002 - in other words 22% tax relief immediately and the remaining 18% in nine months. The choices are:

• pay before the tax year end and wait nine months for 40% or,
• carry back, and wait a few days until the next tax year starts; receive 22% tax relief immediately and 18% in nine months.

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The end of the tax year 2000/01 sees the abolition of some important benefits. Changes to life cover and waiver of contribution will also occur at the end of this tax year:

• in future, the cost of life cover cannot be more than 10% of the contribution, rather than 5% of net relevant earnings as at present. This will really limit the life cover that can be obtained by individuals paying low contributions and cause problems for anyone wishing or needing to reduce future contributions
• from 6 April 2001, an individual will no longer be allowed to use part of the pension contributions to fund for a waiver benefit. Contracts in place before then can continue on the current basis provided the plan included a waiver option "even where that option has not been exercised at that date"
• anyone wishing to insure against not being able to afford a contribution due to illness or accident (or unemployment) will have to take out an unconnected plan which will not obtain tax relief on the contributions
• if the individual uses the benefits from a waiver plan to fund a personal pension they will be able to pay net of basic rate tax

These changes mean that higher rate taxpayers whose earnings cease in the future will lose out on tax relief on the contributions. Also, anyone paying contributions over £3,600 who suffers a long term illness - and likely to have no net relevant earnings - will eventually be limited to only being able to pay £3,600 into their personal pension plan.

Consider someone paying say, £10,000 pa and making a claim under existing or new waiver. The existing waiver would credit the plan with £10,000 pa potentially through to retirement, whereas under new waiver the maximum contribution to the plan may be limited to £3,600 pa in five years time.

The new dilemma

The year-end choices may be difficult. Will the current rules for life cover be more beneficial for an individual than the rules after 5 April? Should contributions be paid before the year-end to obtain the current waiver rules or will waiting until after the year-end (and carrying back) be more beneficial with better cash flow?

An Independent Financial Adviser can help with these decisions, and offer guidance through this maze of 'simplification'.

 

Every care has been taken to ensure that the information given in this document is correct and in accordance with our understanding of current law and Inland Revenue practice. The law and Inland Revenue practice are subject to change.

1^st June 2001

 

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If you would like any further information or advice on any pension or investment issue please contact
CAMPBELL HARRISON
Pensions and Investment Managers
3 Cloisters Chambers, St Peter's Close, Sheffield S1 2EJ
E-mail: steve@campbellharrison.co.uk
Tel: 0114 272 3994  Fax: 0114 272 3775
Regulated by the Personal Investment Authority

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