Trying To Move On

Prior to 'A' Day, pensions schemes were essentially comprised of basic state pensions, a variety of earnings related pensions in succession, Occupational and Individual pension schemes. Most of these schemes have continued after 'A' Day, but not without some variations in their relevance and more so in the tax legislation that governs them.

State pension, before 'A' Day assumed these forms: basic state pension and some top-ups. The level of basic state pension one is entitled to depends on the level of National Insurance Contributions (NICs) built up. The top-ups were additional earnings related pension schemes. State Graduated Pension Scheme was the first to be introduced and was utilised from 1961 to 1975. It was replaced by State Earnings Related Pensions Schme (SERPS) from 1978 to 2002. In 2002, a new top-up showed its head, replacing SERPS, and was called the State Second Pension Scheme (S2P). S2P has still continued after 'A' Day, and those with pensions that amassed benefits between 1961 and 1975 will still benefit from State Graduated Pension Scheme, whereas those with benefits built up between 1978 and 2002, will still enjoy SERPS. Basic State Pension has not changed, however.

Occupational schemes are also called 'employer sponsored arrangements'. Before 'A' Day, employers had to contribute to this scheme, and some employees could be asked to contribute as a condition of membership. The self-employed and those in partnership could not contribute. Occupational pension schemes were governed by rules set by Her Majesty's Revenue and Customs (HMRC) [name given to the merger of Inland Revenue and Customs and Excise]. These rules were embodied in a book called the Practice Notes. Occupational schemes were said to be 'benefit' driven, which meant that there was a limit as to the benefits that could be accrued in a scheme enforced by the HMRC rules.

Employee sponsored arrangements took a wide variety of forms namely: Final Salary , Contracted In Money Purchase (CIMP), Contracted Out Money Purchase (COMP), Additional Voluntary Contribution (AVC), Free Standing Additional Voluntary Contribution (FSAVC), Executive Personal Pension (EPP), Section 32 Buy Out Contracts or Bonds, and Small Self Administered Schemes (SSASs).

The benefit built up under a Final Salary scheme forms a proportion of the final renumeration of the employee. This scheme is as a result also called Defined Benefit, since the benefit can be established with certainty.

The other employer sponsored arrangements mentioned above have continued after 'A' Day, but EPP, FSAVC and Section 32 Buy Out Contracts, have become somewhat redundant because the special features which they bore are no longer needed. Unlike the Final Salary scheme, the benefit under the other employer sponsored arrangements can not be determined for sure. It depends on the size of the contribution in the fund, at the time of retirement or death, and the annuity rates existent at retirement. These schemes are thus collectively known as Money Purchase schemes.

One remarkable change that has taken place with the advent of 'A' Day, has been the discarding of the HMRC rules that governed the employee sponsored arrangements. The Practice Notes have been replaced by The Registered Pension Schemes Manual. There is now no limit as to the amount of benefits that can be built up in a scheme, although there will be tax charges if the total benefits amassed under all schemes exceed a lifetime allowance.

Has 'A' Day gotten rid of every benefit and contribution rule that existed in every scheme? The answer is 'no'. As regards the quantitative benefits and contributions that can be made under occupational pension schemes, there is no limit, but various schemes will have their own rules regarding other matters of benefits and contributions. It is likely that some schemes will maintain these rules after 'A' Day, and hence participants will not see much change, in spite of there been a new tax legislations introduced by the Registered Pensions Schemes Manual.

Another category of pension that existed before 'A' Day was Individual pensions. This was also governed by HMRC rules, but they have been under the control of rules embodied in what is callled Guidance Notes after 5th April, 2006. They used to be 'contribution driven', which means that the HMRC rules placed a limit on the amount of contributions that a participant could make. There is however no such limitation after 'A' Day. The employed, self-employed, as well as those in partnerships could contribute, and there has been no change in this aspect of Individual pensions.

The main types of Individual pensions that existed were: Personal Pension Plans (PPPs), Group Personal Pensions (GPPs), Stakeholder Pension Plans, Self Invested Pension Plans (SIPPs), and Retirement Annuity Contracts (RACs). All these schemes are extant, except that the differences that existed between RACs and the other Individual pensions have vanished. The benefits under an Individual pension cannot be guaranteed, and hence these schemes may be called 'Money Purchase' schemes.

Most of the pension schemes that one comes across today were give birth to prior to 'A' Day. It is, however, important to note that Cash Balance Plans, is a new scheme, that came into play after 'A' Day. Cash Balance Plans do bear resemblance to both Defined Benefit schemes and Money Purchase schemes. It looks like Money Purchase in the sense that part of the benefit depends on the size of the fund at retirement or death, and as such cannot be guaranteed. There is as well a feature of Defined Benefit, in that there is a promise of minimum return on contribution or a specified monetary amount at retirement.

To sum it all up, 'A' Day has provided a more simplified tax legislation and regulatory regime. It has let to a variety of changes, the most important perhaps being the eradication of limits regarding benefits that can be accrued and contributions which can be made. In other words, it has gotten rid of what used to be a marked difference between Occupational and Individual Pension schemes.

David Opoku. BA Hons. Accounting and Finance. Certified Financial Adviser and Stockbroker. E-mail: davido312@aol.com

I have a BA Hons. degree in Accounting and Finance. I am currently specialising in Financial planning.

Dear Margo - DEAR MARGO: I am a 23-year-old Catholic male.