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Replies to Queries - 1 - The pensions maze

14 November 2001
Issue: 3833 / Categories:

I have been trying to obtain an answer to the following query relative to stakeholder pension premiums and retirement annuity premiums without much success.

I understand that a premium based on the current year's income can be split between a retirement annuity and stakeholder pension up to a maximum of £3,600, provided that the retirement annuity premium is within its own limits.

I have been trying to obtain an answer to the following query relative to stakeholder pension premiums and retirement annuity premiums without much success.

I understand that a premium based on the current year's income can be split between a retirement annuity and stakeholder pension up to a maximum of £3,600, provided that the retirement annuity premium is within its own limits.

However, if, for instance, my income in the relevant tax year was, say, £nil, but I still had unused retirement annuity relief from five years earlier, am I correct in presuming that I can pay a stakeholder premium of £3,600 gross and pay a retirement annuity premium of a further £500 on top of that, utilising unused retirement annuity relief carried forward from five years previously, so that I was effectively paying (gross) £4,100 in a year? Moreover, I could continue to do this until the five years' carry forward relief had been utilised or expired.

I also presume that the situation would be no different if my income in the year was, for instance, £5,000. That is to say, I could offset the whole of the current year's income (up to £18,000) against the stakeholder premium of £3,600 and pay a further retirement annuity premium of £500 on top of that, carrying forward any unused retirement annuity relief from previous years.

I have endeavoured to obtain an answer about the interaction of stakeholder premiums with the carry forward and carry back provisions relating to retirement annuity premium relief from my local tax office and from the Occupational Pensions Advisory Service, but neither has been able to give a satisfactory answer. My tax office stated that it had no further information, other than confirming carry forward is available for retirement annuity premiums and OPAS merely stated that the allowance of £3,600 can be split between retirement annuity premiums and stakeholder premiums.

(Query T15,908) – RW.

 

This query raises the problems of operating section 655(1), Taxes Act 1988, which have been discussed on a number of occasions in Taxation (for example, 29 October 1998, Keith Gordon; 26 June 1997, Mike Thexton; 6 July 1995, Mike Thexton) and once by the Special Commissioners (Brock v O'Connor, SpC 157). Although the introduction of stakeholder pensions has changed some of the legislation in this area, it appears that section 655 has had no material changes (only to make clear that the gross premium relieved under section 639 is to be considered), so presumably it is still supposed to work in the same way as it did before.

The Revenue's approach, reflected in their 'help sheets' and supported by the Special Commissioners in Brock v O'Connor, is to apply the interaction rules in section 655 on a cumulative basis. That means that:

* the retirement annuity premium paid is deducted from the total gross personal pension premiums relievable in the year, including any brought forward relief (which has now been abolished); then

* any personal pension premium paid is deducted (gross) from the total retirement annuity premium entitlement for the year (including any brought forward relief) in determining whether any unused retirement annuity premium relief is carried forward.

The key to understanding this (which is not easy) is to appreciate the order in which the calculations are made. The retirement annuity premium paid is dealt with first, which is what defeats the logic used by 'RW' – it is not possible to 'pay a stakeholder premium … and a retirement annuity premium … on top of that'. In the example given by 'RW', the payment of £500 in retirement annuity premiums will generally reduce the stakeholder entitlement to £3,100, regardless of whether 'unused relief brought forward' is being used.

However, 'RW' has chosen a peculiar situation to start with: no relevant earnings at all for the current year. This means that no relief can be given under the retirement annuity premium rules, because relief is still only obtained by deduction from earnings – unused relief brought forward is irrelevant. Retirement annuity premiums can still be paid even if no tax relief is available (unlike personal pension premiums), so it would be possible to pay £500 in retirement annuity premiums in this example; and they would not be taken into account to reduce the maximum personal pension premiums, because section 655 requires that 'relief is given for the year under section 619'. The 'cost' of the retirement annuity premium would simply be the gross £500, while the personal pension premiums could still be paid net of basic rate tax (£2,808 for a contribution of £3,600).

In the second example, where current income is £5,000 (or is it £18,000? I am confused by the two figures for earnings), the retirement annuity premium limit would certainly exceed £500, so relief would be given under section 619, and the maximum personal pension premiums would be reduced under section 655 to £3,100 gross (£2,418 net).

The decision in Brock v O'Connor must also be taken into account. This was that the Revenue was right to use section 655(1)(b) to reduce unused retirement annuity premium relief carried forward by personal pension premiums paid, even in a year when no retirement annuity premium was paid. This means that the payment of £3,600 in personal pension premiums is likely to use up unused retirement annuity premium relief brought forward: if the current retirement annuity premium limit is, say, 20 per cent x £5,000 = £1,000, then payment of £3,600 of either type would reduce the unused retirement annuity premium relief brought forward by £2,600. There is an argument that this should not happen in a year in which there are no earnings, but it is a technical one and is not reflected in the Revenue's forms.

Lastly, a curiosity: the 'interaction' form in Revenue Help Sheet IR330 for the 2000-01 tax return does not have separate columns for retirement annuity relief and personal pension relief for years after 2000-01. I cannot see any reason for this in section 655 – the problem (and the rules) still seems to apply. Perhaps the 2001-02 Help Sheet (once described by a friend as 'misleadingly named' – it carries the legend 'you must follow the instructions very carefully to calculate the relief correctly') will cast some light on this, or else this version heralds a change to come in the next Budget. – Leyborne.

 

'RW' wishes to know if a contribution can be made into both a stakeholder pension and into a retirement annuity policy in the same year.

For the stakeholder pension, it must be remembered that it is simply a form of personal pension. Section 632A, Taxes Act 1988 identifies who is eligible to contribute into a personal pension policy. This is any person with net relevant earnings or, if he does not have net relevant earnings, a person who is not a member of an occupational pension scheme, or if so earns less than £30,000 per year and who also meets one of four conditions. One of those conditions is to be United Kingdom resident and ordinarily resident.

Therefore it is highly likely that 'RW' will be eligible to make contributions into a personal pension policy. The maximum amount to be contributed is set out by section 639(1B), Taxes Act 1988 and it is the greater of the earnings threshold of £3,600 or the relevant percentage multiplied by the net relevant earnings.

Basic rate tax relief will be given at source and any higher rate tax relief that may be due will be given by an extension of the basic rate band.

For a retirement annuity premium, the contribution of £500 would be paid gross. Providing the source giving rise to the relevant earnings has not ceased and there is unused relief being carried forward under section 625, Taxes Act 1988, the fact that there are no net relevant earnings against which the contribution can be set does not prevent the payment of the premium into the retirement annuity policy. It is simply the case that no tax relief is secured for the premium paid. So long as the net relevant earnings exceed the premium paid, and the maximum retirement annuity payment for the year plus unused relief brought forward is greater than the premium, full relief will be given for the premium as a deduction against the relevant earnings.

So far so good; the final point to consider is the interaction of the régimes for retirement annuity policies and personal pension policies and this is dealt with at section 655, Taxes Act 1988. At section 655(1)(a), the legislation makes it clear that the maximum amount that can be paid into a personal pension policy in any year has to be reduced by the amount of any premiums paid into a retirement annuity policy in the same year. Therefore if £500 is paid into a retirement annuity policy, then assuming the personal pension limit is £3,600, this will be restricted to £3,100.

The only possible get-out is that the legislation at section 655(1)(a) refers to relief being given on the retirement annuity premium. Therefore if there are no net relevant earnings for the year against which the retirement annuity premium could be set, it would appear that the full £3,600 could be paid into a personal pension policy. – Hodgy.

Issue: 3833 / Categories:
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