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
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
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.
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.
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.
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
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.
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
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.