Introduced from 6 April 1996 self assessment represents a significant
change in the way of taxing income of the self employed, partnerships
and other incomes. Self assessment requires that the tax returns
must be made by the 31 January following the tax year in which
it relates. If the taxpayer wishes the Inland Revenue to calculate
the tax for them, the return must be made by the 30 September
following the tax year, or two months after issue if later.
The payment for income tax and National
Insurance (NI) will be made on account on the 31 January
and the 31 July in the tax year concerned with a balancing payment
due on the following 31 January. All personal
pension contributions after 6 April 2001 are paid net of
basic rate tax so adjustments for the self employed in their
self assessment at the end of the tax year are not necessary
unless higher rate tax is paid.
Also, for carry
back relief, any lump sum personal pension payment to the
previous tax year must be made by 31 January of the current
tax year. This restriction does not apply to retirement annuity
policies (RAPs) that can use both carry back and carry
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
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 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.
Under the Financial Services Act 1986, the self regulating organisation
(SRO) was set up to be directly responsible for governing investment
business. However, under the Financial Services and Markets
Act 2000 (FSMA) the
SRO will be abolished and their responsibilities have been transferred
to the Financial Services Authority (FSA)
For individuals that have larger sums to invest, rather than
using collective investments such as unit trusts, investment
trusts or investment
bonds, stockbrokers can construct a portfolio of individual
shares. On divorce,
judicial separation or nullity of marriage the court may grant
a financial order requiring the transfer of shares between spouses.
In this case the transfer should be completed during the tax
year of separation when the no gains / no loss treatment between
spouse rule applies. If the shares are to be sold so that a
cash sum can be transferred to the former spouse, the shareholder
will be liable for capital gains tax (CGT) on any gains.
If the shares have been held for a long period of time, there
could be allowances available to reduce the chargeable gain
such as indexation relief, taper relief and the annual personal
CGT exemption of £7,700 for the 2002 / 2003 tax year.
If the parties hold un-quoted shares in a family company it
may be difficult to sell the shares due to established agreements
on the disposal of such shares. Furthermore, it may be difficult
to find a buyer for the shares at that time due to the nature
of the family business and the general lack of a market for
defined contribution scheme
Similar to a personal pension, the simplified defined contribution
scheme (SDCS) has not been very successful compared to other
pension arrangements. Membership to an SDCS is not permitted
for a 20% director and concurrent membership is not allowed
except with a free standing additional voluntary contribution
The maximum contribution to an SDCS is 15.0% for the scheme
member but 17.5% for both the member and employer contributions
combined, including those to an FSAVC, with up to 5.0% going
towards a lump sum death benefit. There are no limits on the retirement
benefits from an SDCS and the member is allowed a 25.0%
commutation to a tax free lump sum.
or joint life
For pension arrangements the only time they have an option
or a single or joint life is when the individual uses the 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.
The annuity must be acquired
from a pension fund between the ages of 50 to 75 years. It is
also possible for a purchased
life annuity or a with
profits annuity to be bought as a single or joint life. The pension income from a single life annuity will be greater
than a joint life annuity due to mortality
because it is going to be paid out for a shorter period of time. The
annuity is paid for the life of the annuitant and ceases on
If the annuitant is married or has a partner that does not have
a source of independent income, the pension income can be shared
as joint life annuity. A survivors
pension is provided offering the spouse the security on
the death of the annuitant of an income of either 100% or reducing to
50% or 67% of the original pension annuity.
self administered scheme
Following the publication of Memorandum 58 by the Superannuation
fund office, now known as the Pension Schemes Office (PSO),
small self administered schemes (SSAS) were established in February
A SSAS can have up to twelve members who are typically controlling
directors or senior employees. The SSAS must receive approval
from the PSO, appoint a pensioneer
trustee to oversee the management and regulation of the
scheme and is required to be valued every three years.
A SSAS can be very flexible in terms of the investment choice
as it is not limited to insurance funds and can include loans
to the employer and the purchase of unquoted company shares.
However, a SSAS is an occupational
money purchase scheme and benefits will be limited by PSO
regulations based on earnings at retirement and length of service.
There is also the opportunity for commutation to a tax
free lump sum of up to 1.5 times final remuneration. For
a post 89 member, these benefits will be subject to the earnings
Where an individual at retirement is considering their options,
they could seek an annuity and pension firm giving specialist
advice from an independent financial adviser (IFA).
Two thirds of people in the UK are retiring today only to accept
a poor annuity income from their pension provider, however all have the opportunity to use an open
market option that could increased this income by up to
25%. It may be that other options such as pension drawdown or phased retirement would be more suitable than an annuity.
The annuitant could benefit from an enhanced
annuity or impaired
annuity and this option must be explored before buying the
annuity. This could greatly increase the income from an annuity
and applies to both a purchase
life annuity, that is bought with a lump sum, and a pension
Advice given by an IFA means that the annuitant benefits from
the consumer protection provided by the Financial Services Authority
(FSA) if the advice given was not appropriate.
Security Act 1973
The introduction of The Social Security Act 1973 (SSA 73), saw
a significant improvement in the members
pension rights for private sector companies. Prior to this
Act members had no statutory rights to any benefits accrued
in an occupational pension scheme for members leaving
When the Act was introduced on 6 April 1975 it allowed for the
preservation of a members pension rights, known as preserved
benefits, after 5 years of service and would include both employee
and employer contributions. For less than 5 years service the
scheme member was entitled to a refund
of contributions that they had personally made to the scheme.
Society of Pension Consultants
The Society of Pension Consultants (SPC) is the only body to
focus on the whole range of pension related functions across
the whole range of non-State provisions, through a wide spread
of providers of advice and services. The SPC is the body that
represents providers of advice and services needed to establish
and operate personal
pension and occupational schemes and related benefit provisions.
The majority of the 500 largest UK pension schemes and thousands
of smaller funds use SPC Member services.
The fundamental aims of the SPC is to draw upon the knowledge
and experience of SPC Members so as to contribute to legislation
and other general developments offering pension and related
benefit provision, and to provide SPC Members with services
useful to their business.
It is also usual for experts on pensions on divorce to also
be members of the SPC and to be either a pensions consultant
The Society of Pension Consultants has Members that employ about
14,000 people providing pension related advice and services.
SPC Members include accounting firms, solicitors, life offices,
investment houses, investment performance measurers, pensions
consultant and actuaries, independent trustees and external pension
For a couple on divorce or nullity of marriage the partner is
a pension scheme member, the former spouse will lose retirement
benefits that he or she would have been entitled to had the
marriage continued. For an occupational pension scheme such
as a final
salary pension the spouses lost rights will include a share
of the members pension rights at retirement
age, as a pension income and with the option of a commutation
to a tax free lump sum.
If the spouse was preceded in death by the partner a widows
pension would have been payable until the death of the spouse.
Had the partner died before reaching the normal pension age,
a death in
service benefit would be payable by the scheme trustees
to the dependants that almost certainly would be the spouse,
as well as a widows pension.
The spouses lost rights should be reflected in the valuations method of the retirement benefits as documented in a pension
audit undertaken by a pensions consultant with the relevant
qualification such as G60 Pensions or equivalent.
Designed to give the member more control over income at retirement
age, staggered vesting or phased
retirement allows segments of the pension fund to be drawn
when required. Segmentation will apply to a personal pension plan and this will consist
of up to 1,000 identical but separate segments.
Each time the member draws a segment, a tax
free lump sum of 25.0% can be taken and the balance must be used
to purchase a pension
annuity such as a conventional (standard) annuity or possibly a with
profits annuity. The
remaining fund value will remain invested with the life assurance
With staggered vesting the individual can use segments of the pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuities. 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.