On the 6 July following the end of each tax year, the employer
must provide the form P11D to the employees showing the taxable
cash equivalent of all benefits
in kind. A P11D reflects the value of benefits for the
tax year already ended. So by this time there is no longer
an opportunity for the employee to make contributions to additional
voluntary contributions (AVC) to absorb the value of taxable
benefits in kind that are pensionable
This is a method of calculating the value of member's benefits
in a scheme. It takes account of the reserves within a final
salary pension to cover future salary increases as a result
of inflation and career progression.
Pay as you earn
For employees and directors with income tax due under schedule
E in respect to emoluments including all salaries, fees, wages
and profits, the payment of tax will be made under the pay
as you earn (PAYE) system. The employer is responsible for:
correct tax and National
Insurance (NI) before paying the earnings net to the
employee or director keep a record of pay and deductions;
|Paying the tax
and NI to the collector of taxes every month;
the Inland Revenue a year end return for deductions and
By using the Inland Revenue PAYE codes
and tax tables the employer must make the appropriate deductions,
issue the employee a pay slip and pay all money owed for PAYE
and NI by the 19th of each month to the Inland Revenue. Each
year on the 19 May the employer must provide the Inspector
of Taxes form P14 for each employee showing the returns for
the year as well as form P35 and on the 6 July each year form
P9D and P11D benefits that detail the employee expenses and
These are schemes that will pay an income to an individual
at retirement age as an annuity and are taxed as earned income. Employees,
Directors (Schedule E) and the employer can fund occupational
pension schemes or an individual may fund their own personal
pension. For a defined benefit occupational pension scheme,
the Pension Schemes Office (PSO) sets limits to the amount
of benefit that can be taken in terms of an income and tax
free lump sum, being based on the net relevant earnings
in the year prior to retirement.
For individual employees or the self-employed making contributions
to a defined
contribution scheme such as a money purchase or personal
pension, there are limits set by HM Revenue & Customs as to the level of contribution
based on the Annual Allowance of £235,000 for the 2008/09 tax year. The contributions to an exempt approved pension scheme
will qualify for tax relief but an unapproved scheme will
not. Rules allow an individual a contribution of either £3,600 per annum or 100% of
their earnings in order to benefit from tax relief at their
marginal rate of tax.
At retirement the individual can use a pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.
In practice, the members pension rights for divorce cases prior to the Pensions Act 1995 could not be divided
so the former spouse would be left with no retirement benefits.
Instead offsetting would be used against other matrimonial property, such as
the family home and the pension scheme member would be directed
to pay to their spouse a greater share of the matrimonial
The courts generally had no power to order
payments to the former spouse from retirement benefits. Section
166 of the Pensions Act 1995 inserted sections 25B to 25D
in the Matrimonial
Causes Act 1973 (MCA 73) that gave the courts the power
of pension earmarking, which has applied to all divorces petitioned
since 1 July 1996 where couples in divorce were unable to
reach an out-of-court settlement. The Pensions Act 1995 permits
earmarking of the tax free lump sum at retirement, death
in service benefit, death benefits post retirement and
pensions in payment.
However, there is no provision for earmarking of the spouses pension rights as this potentially could be
paid to someone else on the death of the pension scheme member.
The Pensions Act 1995 provides a statutory method for calculating
a value of the retirement benefits in today's terms in the
form of a cash equivalent transfer value (CETV).
This was contrary to the preferred method of family solicitors
in Scotland of using the past service reserve.
Since 6 April 2006 Pension Simplification has replaced eight tax regimes and introduced two new controls. Firstly there is a Lifetime Allowance where the maximum amount of pension
savings that can benefit from tax relief and has been initially
set at £1.5 million for the 2006/07 tax year increasing to £1.8 million for the 2010/11 tax year.
The other control is the Annual Allowance that limits the amount that can be contributed to a pension to £215,000 for the 2006/07 tax year rising to £255,000
by 2010/11 tax year. However, the rules allow an individual
to contribute either £3,600 per annum or 100% of their earnings in order to benefit from tax relief at their
marginal rate of tax.
The pension market in the UK is still complex and provides for individuals,
groups, personal and occupational schemes. This
includes pension arrangements that are active for existing
members but closed to new business due to costs or have been superceded
by a new pension regime. Other arrangements allow the occupational scheme member to
make extra payments to enhance retirement benefits. This can
be achieved by using free standing additional voluntary contribution
schemes or additional voluntary contribution (AVC).
schemes also allow members to enhance benefits by purchasing
added years. Other more specialised arrangements include executive
pension plans (EPP)
and small self administered schemes (SSAS) or
self invested personal pensions (SIPPs)
that offer more flexible investment choice than an insured
At retirement the individual will receive a pension income from a defined benefit scheme or if a money purchase scheme such as a personal pension can use a pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.
This is the process to determine the value of a members pension
benefits. This involves the accurate collection of relevant
data from the members scheme; the application of appropriate
mathematical assumptions to determine a fair value for all
benefits with reference to offsetting, earmarking and pension
sharing and the presentation of these findings in a compliant
format showing a knowledge of the client and best advice given.
The pension audit will use the cash equivalent transfer value
(CETV) from the scheme administrator as the basis of the calculation
in order to produce an adjusted CETV reflecting the circumstances
and specific needs of the parties.
The pension audit should be conduced by a pensions consultant
that is a pensions
expert with a recognised qualification such as G60 Pensions
or equivalent. The parties should also have sufficient confidence
that the pensions expert is knowledgeable in the area of pensions
For pension sharing on divorce, the court must determine the
percentage to be applied to a cash equivalent transfer value
(CETV) from the provider or a suitably adjusted
CETV from a pensions expert, in order to create a pension
credit to the pension scheme member's former spouse. In a
pension scheme the former spouse may be made a scheme
member if dual membership is allowed.
This scheme will be subject to minimum funding requirements
and if the scheme is found to be in deficit, a pension credit
may be reduced by the percentage the scheme is under funded
by at the valuation date. This reduction will be applied if
the pension credit is paid as an external
transfer. However, if the former spouse is allowed dual
membership to the scheme and opts for an internal transfer,
the pension credit is unlikely to be reduced.
In the case of an unfunded public service scheme an external
transfer is not permissible, therefore the former spouse must
apply the pension credit to an internal
transfer. An unfunded scheme does not need to comply with
the MFR as benefits are guaranteed by statute and therefore
a deficit to the scheme member can never occur.