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   Pension arrangements
  Pension Arrangements
  FSAVC schemes   SIPP schemes
  Personal pensions   Section 32 buyout
  Stakeholder pensions  

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FSAVC schemes
A pension plan where the scheme member can make extra contributions that are separate from the occupational pension scheme is called a free standing additional voluntary contribution (FSAVC) scheme. The FSAVC contributions are free standing in that they will be made to a life assurance company through a defined contribution scheme.

Since 6 April 2006 HM Revenue & Customs maximum contributions to occupational pension have changed. The rules allow an employee 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 maximum Annual Allowance will increase in each subsequent year from the 2006/07 tax year of £215,000. This contribution ceiling will rise by £10,000 per annum to £255,000 by 2010/11 tax year. The annual allowance ceiling represents the combined amount that an employee and their employer can contribute to pensions during the year without a tax penalty. If the scheme member exceeds the HM Revenue & Customs limit of £235,000 for the 2008/09 tax year, there will be an annual allowance charge applied of 40% under self-assessment on any excess contribution.

Previous to A-Day the maximum contribution was limited to 15.0% of taxable earning. The scheme member of a free standing additional contribution scheme with contributions of more than £2,400 gross per annum would have required a headroom check and at this time there was no opportunity for the scheme member to commute part of the fund value to a tax free lump sum.

The income from an FSAVC is based on the contributions made by the member, investment return and the pension fund value must be used to buy pension annuities at retirement. When making an annuity purchase the individual has the option to search for the highest annuity rates using an open market option, however, learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.

Since A-Day, the Pension Simplification rules introduced from 6 April 2006 allow a tax free lump sum of 25% to be taken from an FSAVC or AVC. Previous to A-Day, there was no possibility for commutation to a tax free lump sum with an AVC and the whole of the fund value must purchase a compulsory purchase annuity providing a pension income at retirement age.

With Pensions Simplification, for those employees that are members of their occupational pension scheme, multiple pension scheme membership will allow them to contribute to as many pension scheme types as their personal circumstances require with the only restriction being the annual allowance and lifetime allowance.

Personal pension
The personal pension replaced retirement annuity policies (RAPs) and Section 226 policies from 1 July 1988 being approved under Chapter IV of part XIV of the Income and Corporation Taxes Act 1988 (ICTA).

The RAPs are approved under Chapter III of Part XIV of the Income Corporation Taxes Act 1988. Being very similar to personal pensions, RAPs contributions qualify for full tax relief and the pension fund will grow free of tax on investment income and capital gains tax. There is also the possibility for commutation to a tax free lump sum at retirement age. However, retirement age is restricted to between 60 and 75.

Both carry back relief and carry forward relief is available and retirement annuity policies are unaffected by the restrictions imposed on personal pensions from 6 April 2001. Any existing RAPs member can continue to make contributions towards them until their actual retirement age, however these schemes are closed to new business.

Section 226 policies originated from the Income and Corporation Taxes Act 1970. These policies will allow an individual to purchase his or her own pension and includes a lump sum death benefit and offers cash commutation of up to 33.0%, which is higher than a personal pension giving 25.0%. Therefore existing section 226 members should retain these policies to retirement age, however these schemes are closed to new business. At retirement the individual can use the tax free lump sum to buy a purchase life annuity which offers annuity taxation advantages rather than use the whole pension fund for a pension annuity.

Before stakeholder pensions were introduced from 6 April 2001, the personal pension was the most popular type of private pension scheme taken out by an individual. Also for an employers pension scheme a group personal pension (GPP) is now more common mainly due to their simplicity and low administration cost of operation. Since the 6 April 2001 stakeholder pensions have been available and can be used where a personal pension is not appropriate, for example, when the individual has no taxable earnings.

All personal pensions are contributory schemes and can be taken out by the self employed or employed as well as allowing an employer to make contributions directly to the plan. However, an individual cannot contribute to a personal pension where they are already making payments to an occupational pension scheme such as final salary pension or additional voluntary contribution (AVC) scheme as concurrent membership is not permitted.

The retirement age can be selected between 50 to 75 and retirement benefits taken as a pension income provided by a compulsory purchase annuity or pension annuity and allowing the scheme member a commutation to a tax free lump sum of 25.0% of the pension fund value. The member could defer the purchase of annuities by opting for pension drawdown but at age 75, must finally purchase an annuity. However, an open annuity may allow anyone with funds of £250,000 to avoid purchasing conventional annuities and therefore there is the opportunity to leave the residual pension fund to beneficiaries after 75 years of age.

Section 32 buyout
The paid-up pension rights and entitlements from a previous employment such as an occupational pension scheme can be transferred to section 32 buyout policies. These policies were introduced in 1981 and where the scheme member is transferring guaranteed minimum pension (GMP) rights from a contracted out scheme the revalued GMP rights will be provided at the state retirement age. Benefits can be taken between the age of 50 and 75 as well as a tax free lump sum.

Self invested personal pension
For self employed individuals that want to manage their own pension fund assets, a self invested personal pension scheme (SIPPs) will allow this option. SIPPs operate on a similar basis to insured personal pensions with access to collective funds, except that the Inland Revenue also allows direct investment in UK and overseas quoted securities as well as commercial property. However, between the extremes of an insured personal pension and SIPPs are private managed funds (PMFs).

Unlike small self administered schemes (SSAS), which is a defined benefit regime, the defined contribution regime of a SIPPs restricts the contributions made to that of a personal pension with no facility to make loans to members. Most SIPPs will start with a significant pension transfer from an existing occupational pension scheme or personal pension. The main advantage of SIPPs to some individual investors or partnerships is the ability to purchase their own commercial property that will then be let back to the individual or partnership.

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.

The maximum annual contribution to a Stakeholder pension is £3,600 or 100% of earnings with tax relief as a result of Pensions Simplification from 6 April 2006.

For members of an occupational pension scheme the Inland Revenue will allow them as a result of Pensions Simplification, concurrent membership of as many other pension schemes as is required subject to the the annual allowance and lifetime allowance.

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