Archives >

The Government published its long-awaited Green Paper on Saving for Retirement at the end of last year. The main changes proposed are that:

•            The percentage-of-income limits on pension contributions will be abolished. Instead, an individual will be able to contribute any amount to a pension plan, up to a sum equal to his total earnings for the (tax) year. Individuals with no or very low earnings will still be able to contribute up to £3,600 a year to a stakeholder pension plan.

•             Total contributions to pension arrangements for an individual will be capped at £200,000 a year. Although this seems a very high figure, it may be relevant where a family company wishes to buy a pension for a long-serving director or employee on the point of retirement.

•             Tax relief will be clawed back where an individual’s pension fund exceeds £1.4 million – obviously, this will affect relatively few people.

The new rules, when introduced, will simplify pension planning. The bad news is that the Government appears determined not to abolish the rule that the bulk of a pension fund must be used to buy an annuity, no later than age 75.

Pension contributions and Tax Credits

A point not mentioned in the Green Paper is that, for many lower and middle-income families, the effective Government subsidy on pension contributions is now 59%: 22% tax relief plus 37% Tax Credit taper. Shortly put, from April 2003 a family’s Tax Credit entitlement (except their entitlement to the basic £545 a year Child Tax Credit or £1,090 New Baby Credit) reduces by 37p for every £1 of income, and in calculating ‘income’, pension contributions may be deducted.

Pension projections and benefit statements

The official estimate is that half of all self-employed people are not currently contributing to any personal pension or stakeholder pension plan. To make sure they realise how little they can expect from the State scheme, the Government will, starting next month (May 2003), send every self-employed person a forecast of his or her National Insurance Retirement Pension.

The rules for the annual statements issued by personal pension and stakeholder plans have also been changed, with effect from 6 April 2003, to require the projected pension to be calculated net of an allowance for inflation between today and the anticipated date of retirement – in other words, to show the value of the pension in today’s money. This lower projection is supposed to goad people to save more, but it may just depress them.