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
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
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).
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.
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.
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
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.
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
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
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.
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
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