Why we need to carry on topping up

Making pension contributions when it suits you saves money. But, says Michael Royde, that flexibility may soon vanish

I have talked to a number of my clients, mainly top rate taxpayers, and asked, "Have you read the Government's proposals for stakeholder pensions?" Without exception the answer has been no. They do not think it applies to them. Yet the proposals abolishing the right to carry forward and carry back contributions will apply to existing personal pension plans ­ and reduce these plans' flexibility and advantages.

I have talked to a number of my clients, mainly top rate taxpayers, and asked, "Have you read the Government's proposals for stakeholder pensions?" Without exception the answer has been no. They do not think it applies to them. Yet the proposals abolishing the right to carry forward and carry back contributions will apply to existing personal pension plans ­ and reduce these plans' flexibility and advantages.

Paragraph 15.3 of the Government's consultation brief, Stakeholder Pensions, Number Six, says: "The Government therefore feels that the new rules will offer sufficient flexibility and the complicated carry forward/carry back rules should be abolished to simplify the system and reduce administration costs. This would have effect from April 2001."

The optional carry back system allows taxpayers to have their pension contributions in one tax year treated as though they were made in the previous year. Carry forward allows taxpayers, in the current tax year, to make use of unused relief from the previous six years (allowing a large lump sum contribution, when it can be afforded).

These two systems mean that if your annual earnings vary, you can top up your pension contributions in good years and exceed the annual contribution limits on which tax relief can be claimed.

Many pension plan holders find carry forward and carry back is a luxury they cannot yet afford, or do not fully understand. But for others, making use of unused pension contributions in years when earnings were poor so as to increase contributions in bumper years when they can be set against top-rate tax, is a vital concession. And it could become more important as earnings become more volatile.

The concession is relevant to many professional people, especially solicitors and accountants whose incomes fluctuate from year to year. It can also apply to individuals, such as dentists and self-employed plumbers, locksmiths and electricians, whose earnings may peak quite early in their careers. Many sales persons who are commission-based also make contributions in good years and none in bad. The abolition of the system would adversely affect them, too.

The Inland Revenue argues that because only 5 per cent of personal pension plan holders make use of these "complicated" arrangements, they can be abolished, thereby simplifying the system and cutting administrative costs. However, most accountants and tax advisers now use computerised programmes to tackle the system.

The Government's plan is to introduce a "five-year continuation facility" allowing people to contribute up to £3,600 a year to a pension in the five years after they have stopped earning or retired. But while this may be helpful to relatively low earners, it is not an acceptable substitute for the majority of people who have used carry back and carry forward in the past, and will now lose out. Abolition, indeed, sounds suspiciously like yet another example of a back-door increase in taxation for the self-employed, hidden in proposals that few people will read. And the rules for the self-employed also apply to members of group personal pension plans, that, increasingly, are adopted by companies as a cheaper alternative to final salary pension schemes.

The number of self-employed who do use carry forward and carry back (about 5 per cent) are among the leading job creators. They need to be encouraged. Many who are starting a new business will not be able to afford pension contributions in the early years, and as they prosper they need to be able to catch up ­ a possibility that will end under the proposed changes.

Under the proposals limited companies with executive pension plans, or the "small self administered schemes" that allow large single premiums to be made, will still be able to catch up on pension contributions by making larger contributions in good years and taking advantage of the flat tax-rate concession. But individual self-employed workers, and employees who do not have final salary pension schemes, may suffer. Financial downturn caused by interest rate rises or alteredcircumstances, can all affect individuals' ability to make full use of pension contribution allowances each year.

The deadline for registeringcomments on the tax aspects of stakeholder proposals is 29 October. If the Government's proposals do go unchallenged, existing personal pension plan holders will suffer a rude awakening in April 2001 when carry back and carry forward disappear. If you are concerned, you could write now to your professional trade body or MP, or contact Jeff Williams at the Inland Revenue, 134, New Wing, Somerset House, Strand, London WC2R 1LB. Or email stakeholder.ir.sh@gtnet. gov.uk.

Michael Royde is an independent financial adviser with offices in Ringwood, Hampshire and London

Independent Partners: 10 top tips for retirement. Get your free guide here

Sport
England's women celebrate after their 3rd place play-off win against Germany
Women's World CupFara Williams converts penalty to secure victory and bronze medals
Arts and Entertainment
Ricardo by Edward Sutcliffe, 2014
artPortraits of LA cricketers from notorious suburb go on display
News
newsHillary Clinton comments on viral Humans of New York photo of gay teenager
Arts and Entertainment
The gang rape scene in the Royal Opera’s production of Gioachino Rossini’s Guillaume Tell has caused huge controversy
music
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    Day In a Page

    The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

    Gaping hole at the heart of the European Union

    Treatment of Greece has shown up a lack of genuine legitimacy
    Number of young homeless in Britain 'more than three times the official figures'

    'Everything changed when I went to the hostel'

    Number of young homeless people in Britain is 'more than three times the official figures'
    Compton Cricket Club

    Compton Cricket Club

    Portraits of LA cricketers from notorious suburb to be displayed in London
    London now the global money-laundering centre for the drug trade, says crime expert

    Wlecome to London, drug money-laundering centre for the world

    'Mexico is its heart and London is its head'
    The Buddhist temple minutes from Centre Court that helps a winner keep on winning

    The Buddhist temple minutes from Centre Court

    It helps a winner keep on winning
    Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

    Is this the future of flying?

    Battery-powered planes made of plastic, and without flight decks
    Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

    Isis are barbarians

    but the Caliphate is an ancient Muslim ideal
    The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

    Curse of Brink's Mat strikes again

    Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
    Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

    'The ministers talk to us about miracles'

    Why Greeks are cynical ahead of the bailout referendum
    Call of the wild: How science is learning to decode the way animals communicate

    Call of the wild

    How science is learning to decode the way animals communicate
    Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

    'The economic collapse has happened. What is at risk now is democracy...'

    If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
    The science of swearing: What lies behind the use of four-letter words?

    The science of swearing

    What lies behind the use of four-letter words?
    The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

    The Real Stories of Migrant Britain

    Clive fled from Zimbabwe - now it won’t have him back
    Africa on the menu: Three foodie friends want to popularise dishes from the continent

    Africa on the menu

    Three foodie friends want to popularise dishes from the hot new continent
    Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

    Who will fill Donna Karan's boots?

    The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'