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Main features
There are two main types of pension scheme: occupational, which are set up or sponsored by employers, and personal, which are set up by the individual. They have similar tax characteristics.
- Contributions by the employer or employee are deductible for tax purposes.
- The funds are free of UK tax on investment income and capital gains, but are not repaid tax credits on dividends.
- The benefits on retirement normally consist of a lifetime pension for the member and widow(er) and a tax-free lump sum.
Some benefits on the member's death before retirement may be free of IT, CGT and IHT, depending on the type of plan and how it is structured.
Occupational pensions
There is an upper limit to the benefits that can be provided. For members who joined a scheme set up after 13 March 1989, or joined an existing scheme after 31 May 1989, the limits are basically:
- Maximum pension is available after 20 years' service. Up to 20 years, the accrual rate can be 1/30 of final remuneration for each year of service.
- Pensionable earnings are limited by a cap (£97,200 in 2002/03) which is usually increased by the RPI.
- The maximum lump sum at retirement is the greater of 3/80 of final pensionable remuneration for each year of service up to 40 years, and 21/4 times the initial actual rate of pension.
- Maximum death-in-service lump sum is four times final pensionable remuneration, ie for 2002/03 up to £388,800, plus return of employee's contributions with interest. A scheme can also provide certain widow(er)'s and dependants' pensions if the member dies either before or after retirement.
- Maximum employee's contribution is 15% of remuneration, ie a maximum of £14,580 for 2002/03.
- A full 2/3 pension is allowed after 20 years' service on retirement starting between ages 50 and 75.
Members who joined earlier than the above dates are subject to fewer restrictions, eg no earnings cap.
Personal pensions (PPs)
Eligible individuals can contribute to ordinary PPs and stakeholder pensions, which are a type of PP intended to be more attractive to lower earners. They have limited charges, permit a low level of monthly contribution and allow contributors to stop and restart payments.
- UK residents and some non-UK residents who previously had UK net relevant earnings (NREs) can contribute up to £3,600 a year. The exception is employees in pensionable employment throughout the year who have no NREs (from another source). Such employees can only contribute if they have P60 earnings of not more than £30,000 and are not controlling directors.
- Individuals can make higher contributions based on their highest net relevant earnings in the six years up to and including the year in which they make the payment. The percentage of NREs they can contribute increases with age.
- All individual contributions are paid net of basic rate tax.
- Contributions are normally allowed for tax in the year of payment, but payments from 6 April to 31 January can be related back to the previous tax year.
- The maximum tax-free lump sum from a PP plan is normally 25% of the fund. Benefits may be taken starting from age 50 and must be taken by age 75.
- PP plan members can defer buying an annuity until age 75, and in the meantime can withdraw income directly from the fund.
- Schemes set up before 1 July 1988 are known as retirement annuities and different rules apply to them, eg there is no maximum level of pensionable earnings and it is possible to catch up on contributions that could have been made in the previous six years. The PP contribution limits apply to those years in which any PP contributions are made.
| Retirement annuities |
Personal pensions |
|
| Max relief |
Max relief |
Max pensionable |
| Age on |
|
|
02/03 |
01/02 |
earnings |
| 6 April |
% |
% |
£ |
£ |
Year |
£ |
| 35 or less |
17.5 |
17.5 |
17,010 |
16,695 |
02/03 |
97,200 |
| 36-45 |
17.5 |
20.0 |
19,440 |
19,080 |
01/02 |
95,400 |
| 46-50 |
17.5 |
25.0 |
24,300 |
23,850 |
00/01 |
91,800 |
| 51-55 |
20.0 |
30.0 |
29,160 |
28,620 |
99/00 |
90,600 |
| 56-60 |
22.5 |
35.0 |
34,020 |
33,390 |
98/99 |
87,600 |
| 61-74 |
27.5 |
40.0 |
38,880 |
38,160 |
97/98 |
84,000 |
Life Assurance: Retirement Annuity and Personal Pensions term assurance started before 6 April 2001: 5% of net relevant earnings. Personal Pensions term assurance started on or after 6 April 2001: 10% of retirement benefit contributions.
% = % of net relevant earnings |
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