The Armed Forces Pension Scheme is a final salary, contracted
out, unfunded occupational
pension scheme and its rules are set out in prerogative
instruments. These documents are not subject to approval, annulment
or amendment by parliament, they derive their authority directly
from the Queen.
Under the Naval and Marine Pay and Pensions Act 1865, the prerogative
instruments for the Royal Navy and Royal Marines is by an Order
of Council, for the Army it is the Pensions Warrant 1977 and
for the RAF it is the Queen's Regulations for the Royal Air
Members that leave a final
salary pension before their normal retirement age with 2
or more year's service can have their benefits held in the scheme
until the stated retirement
age. The benefits will be index linked at the rate of inflation
or 5.0% whichever is the lower.
An individual can invest via a self invested personal pension
scheme (SIPPs), an insured personal pension or private managed
funds (PMFs), the latter being midway between the other two
extremes. PMFs have similar investment restrictions and advantages
as SIPPs but operate as a normal insured
personal pension, having a fund link that is unique to the
individual or partners in a partnership.
The life assurance company will own the assets of the PMFs so
these funds must satisfy various regulations. This includes
the private managed fund managers being authorised by the Financial
Services Authority (FSA)
so technically the individual or partners cannot personally
manage the pension fund, as is possible with a SIPPs.
Where an employer does not have an occupational pension scheme
or where an individual is not eligible to join their employers
pension scheme or wants to make additional contributions independent
of the employer, they will have to establish a private pension
scheme. This could be a defined contribution personal
pension or a stakeholder pension. Contributions made will usually be wholly by the scheme member
although occasionally an employer will make a percentage contribution.
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.
Previous to A-Day the contributions to a personal pension were limited by Inland Revenue maximums,
depending on the age of the member, between 17.5% to 40.0% and
pension limited the contributions to £3,600 per annum
irrespective of age or pensionable earnings.
The pension fund value that determines the pension income at retirement
age will depend on contributions made and the investment return. The individual can use it 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.
An individual can also establish self invested personal pensions
that allow a wider investment choice. As a member of an occupational
pension scheme the individual could make private payments to
a free standing additional voluntary contribution scheme (FSAVC)
that is separate from the employers scheme but they will still
be limited to total contributions of 15.0% of total earnings
as set by the Inland Revenue.
This is insurance taken out by independent financial advisers
(IFA) and other professional
advise to protect clients from financial loss as a result
of fraud or negligence by that firm and where the firm does
not have the short-term reserves to pay compensation. In exceptional
circumstances, such as the pensions review, professional indemnity
insurance may not be sufficient to protect the assets of the
In many parts of England & Wales and Scotland the pension
arrangements could easily be the most valuable asset of a couple
judicial separation and nullity of marriage. In the southeast of England it is usually the case
that the largest asset class will be property, including the
principle residence as well as other investment property.
The most significant capital gains tax (CGT) exemption for most
individuals will be the principle private residence. However,
part of the gain on this property may be taxable if it has not
been the principle residence for the whole of the period of
If in addition to the principle private residence the owner
has a second home or a buy-to-let property, then this property
will be subject to CGT on disposal. It is possible for an individual
with two properties or more to make an election regarding the
principle residence. This election must be made within 2 years
of purchasing the additional properties and the decision can
be changed so long as it is within the 2 year period.
The gain on disposal of an investment property can be reduced
by deducting from the disposal proceeds the acquisition costs
as well as the associated costs of acquisition and disposal
and any improvements. Furthermore the owner can applying indexation
relief for property before 5 April 1998, taper relief from 6
April 1998 and their CGT exemption of £7,700 for the 2002
/ 2003 tax year.
Where an individual contracts out of the state earnings related
pension scheme (SERPS)
using a personal pension or stakeholder pension, a rebate of
some of the National Insurance (NI)
paid for that person is paid to the pension provider sometime
after the end of the tax year by the Inland Revenue. These rebates
are known as protected rights contribution.
Protected rights funds must be held separate to other pension
funds where the benefits may not be taken until age 60 and then
they must be taken wholly as pension
income with no commutation to a tax free lump sum. Where contracting out is via an occupational
defined contribution scheme, protected rights contributions
are made up from a flat rate percentage reduction in NI contributions
plus an age related rebate after the end of the tax year.
Under a defined benefit scheme the pension transfer value equivalent
of any guaranteed
minimum pension (GMP) entitlement earned up to 5 April 1997,
plus all benefits earned after 5 April 1997, must be treated
as protected rights if transferred to either a personal or stakeholder
The civil service, armed forces, NHS, teachers, fire, police
and local authorities have access to a public service scheme
for retirement benefits and where the scheme rules and regulations
are defined by statue. In the case of the principal civil service
scheme, there is no direct cost to the scheme member as it is non contributory.
This is in contrast to the NHS pension scheme where scheme members
are expected to contribute 6.0% of their pensionable earnings.
rate for public service schemes is 1/80th of the final salary
for each year of service with a maximum pension income of 40/80ths
for forty years of service, or half final salary.
In addition there will be a non-optional tax
free lump sum calculated as 3/80ths of final salary for
each year of service with a maximum of 120/80ths for forty years
service. The member can elect for an increase in pension income
at retirement age by the commutation of the tax free lump sum.
However, the pension income will be taxable as earned income.
The pension income and widows pension are subject to limited
price indexation (LPI)
and payments will rise by the retail
price index (RPI) but are capped at 5.0%.
In cases of pension
sharing section 36 of the Welfare Reform and Pensions Act
1999 (WRPA) allows for indexing
benefits so a pension
credit acquired by the former spouse will equal those terms
enjoyed by the scheme member. As statutory schemes are either
unfunded or notionally funded, there is no need to comply with
the minimum funding requirement (MFR) as pension benefits are
guaranteed by statute, unlike private sector employers
A scheme member could create more pension income at retirement
age by applying their commuted tax
free lump sum to a purchased life annuity. This is an annuity
purchased by a private individual with a lump sum ceasing on
the death of the annuitant.
Under section 656 of the Income and Corporation Taxes Act 1988
the income is regarded as capital
and interest. The return of capital that is free of tax
but the interest element will be taxable at the savings rate
of tax of 20%. This is the same as a pension
annuity or compulsory purchase annuity for a pension where
all the income is taxed as earned income at a rate of 20% for the 20009/10 tax year.
This makes the annuity
taxation of a purchased life annuity very favourable compared
to a pension annuity and it provides a higher income net of
tax. Therefore the majority of individuals on retirement that
want to maximise their pension income should commute the maximum
tax free lump sum and use this for a purchased life annuity.
A purchase life annuity offers the annuitant many features such
rate escalation or a guaranteed
period that are similar to that of a pension annuity. To
protect the lump sum in the event of the early death of the
annuitant, this annuity can also provide capital
protection where the balance between the original lump sum
and actual premiums paid is paid to the annuitant's estate.
For a family with an elderly relative that now requires 24 hour
care after suffering an illness, the long
term care costs for a nursing home could be partially funded,
after any contributions by Local Authority or NHS funding, by
needs annuity. This is similar to a purchased life annuity
in that a lump sum is used to purchase an annuity. The main
difference is that the annuitant is usually aged from 80 to
90 years, have a medical condition and the annuity is paid directly
to the nursing care home totally free from tax.