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   Stakeholder pensions    Subordinate legislation    State pension age
   State basic pension    State scheme rights    Surplus
   Survivors pension    State second pension    SERPS

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Stakeholder pensions
Part 1 of the Welfare Reform and Pensions Act 1999 (WRPA) introduced the new stakeholder pensions and this pension regime was made available from the 6 April 2001 as the governments intention to simplify and reduce the cost of pension planning to the consumer. It is targeted particularly for those with fluctuating, low or no taxable earnings such as a non-working spouse.

Since 6 April 2006, Pension Simplification changes have established the Annual Allowance
for contributions at £215,000 for 2006 rising to £255,000 in 2010. Tax relief on contributions is limited to contributions of £3,600 per annum or 100% of relevant earnings if greater. Any investment growth or loss in the value of the stakeholder fund is not included in the annual allowance and retirement benefits can be taken between 50 to 75 years of age until 2010 when the minimum is to be raised to 55 years of age.

A-Day also established a Lifetime Allowance for the size of an individual's money purchase scheme fund to £1.5 million in 2006 rising to £1.8 million in 2010. At retirement a tax free lump sum of 25% can be taken with the remaining fund being used to purchase an annuity or placed within an income drawdown arrangement.

At retirement the individual can use the money purchase 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 annuity quote offering guaranteed rates.

Prior to A-Day the maximum annual contribution to a Stakeholder pension is £3,600. For members of an occupational pension scheme with earnings of less than £30,000, the Inland Revenue will allow them concurrent membership of stakeholder pensions up to the Inland Revenue maximum contribution allowance. The £30,000 threshold will be based on total schedule E income (excluding P11D benefits) with the earliest reference date being the 2000/2001 tax year.

State basic pension
The basic state pension will be paid in full if an individual has been credited with National Insurance (NI) contributions for the majority of that individuals working life. However, a reduced state pension or possibly no pension would be payable if insufficient NI contributions have been made. To be entitled to the full state pension an individual must have nine out of ten years of their working life as qualifying years.

For the basic state pension on divorce, an individual may be able to use the NI contribution record of their former spouse to enhance their own state pension up to the single persons maximum. However, on divorce an individual will have to rely on a pension sharing order to claim benefits from the state earnings related pension (SERPS).

State earnings related pension scheme
In 1978 the Government introduced the state earnings related pension scheme (SERPS) as an earnings related top up to the state basic pension. SERPS has been financed by an increase in the National Insurance (NI) contributions made by both employees and employers. The benefits from SERPS have been significantly reduced for those employees retiring after the year 2000 as a result of Government legislation.

State pension age
In terms of the retirement age, the state retirement pension is paid to people who reach the state pension age of 65 for men and 60 for women and who fulfill the conditions of the National Insurance (NI) contributions. The amount you receive is not affected by your income and savings but is taxable. Parliament has passed legislation to equalise the state retirement age at 65 for both men and women.

Under section 126 of the Pensions Act 1995, this is to be phased in over ten years beginning on the 6 April 2010. No women born before 6 April 1950 will be affected by these changes. Those born after 5 April 1955 will attain pensionable age at 65 and there will be a sliding scale for women born between these dates.

State scheme rights
The state scheme rights can be determined by submitting the BR19 form. This will show the basic pension earned to date and projected basic pension at the retirement age, assuming continued future contributions. Where applicable this will include the state earnings related pension scheme (SERPS) showing the amount of SERPS already earned and projection to retirement date. A lump sum valuation of SERPS can be obtained by submitting the BR20 form.

State second pension
The state earnings related pension scheme (SERPS) has been phased out and replaced with the state second pension (S2P). S2P started on the 6 April 2002 and it is the Government's intention that S2P will double the amount of those earning up to £9,000 a year would have received from the state basic pension and SERPS. As with SERPS, there will be an opportunity for members to contract out of S2P.

Subordinate legislation
The provisions for pension sharing for couples on divorce are provided by the Welfare Reform and Pensions Act 1999 (WRPA) and applies to a divorce petition or nullity petition made after 1 December 2000. In addition the WRPA also amends earmarking legislation introduced by section 166 of the Pensions Act 1995.

However, the majority of the detailed working of pension sharing is provided by subordinate legislation in the form of statutory instruments that exist as specific regulations. Of the more important regulations is the Pension on Divorce etc (Provision of Information) Regulations 2000 that deals with the supply of information requirement from a pension arrangement as well as the valuations method of retirement benefits.

In terms of valuation, the Pension Sharing (Valuation) Regulations 2000 will deal specifically with the calculation of the cash equivalent transfer value (CETV). The Divorce etc (Pensions) Regulations 2000 are concerned primarily with earmarking and the procedures that apply to earmarking if there is subsequently a pension transfer. This has replaced the Divorce etc (Pensions) Regulations 1996 that, although repealed, still provide some useful guidance for the valuation of a members pension rights in paragraphs 14 to 16.

The Pensions on Divorce etc (Charging) Regulations 2000 deal with the pension arrangement and its ability to recover charges as a result of pension sharing and earmarking. Also, the Family Proceedings (Amendment) Rules 2000 provide a procedural code for applications related to pension sharing and earmarking.

For a defined benefit final salary pension the retirement benefits at retirement age may be enhanced as a result of a surplus in the fund. Under section 603 of the Income and Corporation Taxes Act 1988 (ICTA 88) the scheme trustees are required to eliminate any surplus in excess of the calculated statutory level.

This surplus may occur due to good investment return or a slower rise in salaries relative to the average earnings index (AEI). The Inland Revenue does not allow an excessive surplus in an employers pension scheme due to the tax advantages of a pension fund. If the surplus exceeds 5.0% of the scheme liabilities the scheme trustees must act to reduce it and this can be done by allowing the employer a contribution holiday, or for a serious surplus, even make it a non contributory scheme for the employees.

Alternatively the retirement benefits can be improved or a refund made to the employer. If a refund occurs it will be subject to tax at a rate of 40.0% and payable to the Inland Revenue at the time of the refund.

Survivors pension
For a final salary scheme the pension paid to the surviving spouse is expressed as a percentage of the pension the scheme member would have received at retirement age assuming the members current pensionable earnings.

At retirement the individual can use the pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity, adding a survivors pension that can be selected at any percentage but is usually 50%, 66.67% and 100%. 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.

On the death of the annuitant, a pension income will be paid to the spouse for the rest of their life. The higher the percentage chosen, the lower is the pension income paid initially and this also applies to a with profits annuity. A purchase life annuity can also have a similar benefit for the spouse but referred to as a dependents income.

HM Revenue & Customs maximum permissible pension income for an occupational pension scheme paid to the spouse is 2/3rds of the maximum pension that could have been paid to the member had he or she survived to normal retirement age, based on final remuneration at the date of death. In addition to spouses pensions, pensions can also be paid to dependent children while they are minors.

The surviving spouses pension is subject to equalisation rules in the Pensions Act 1995. However, the scheme trustees paying a percentage of expected pension income to a widow can limit payment to a proportion earned since 17 May 1990, which is the date of the Barber Judgment and the European Court of Justice (ECJ) conclusion on equalisation rules.

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