TaxPersonal TaxQ&A: Stakeholder pensions

Q&A: Stakeholder pensions

Each month Frank Haskew and Francesca Lagerberg of the ICAEW's Tax Faculty provide practical advices on topical tax issues.

Mr Burgher has been reading about the changes to pensions and has a few questions.

Q I am rather confused by stakeholder pensions – can you explain please?

A Stakeholder pensions replace personal pensions from 6 April, 2001. Stakeholder pensions are designed to appeal to a wider range of people and any individual aged under 75 can invest up to £3,600 in a stakeholder pension regardless of earnings or if they pay income tax. Contributions above £3,600 are based on the existing personal pension limits but, once a level of contributions has been established, it can continue for five years regardless of earnings.

Benefits, including a 25% tax-free lump sum, can be taken from age 50.

Q Can my wife and children set them up?

A Yes. Contributions are paid net of basic rate tax and, if your wife and children do not pay income tax, they will pay 78% of the contribution and the government will chip in the other 22% up to the £3,600 limit. It looks too good to be true.

Q Sounds great – what’s the catch?

A From 6 April this year it is no longer possible to carry forward unused pension relief from earlier years. This applies to new stakeholder pensions and personal pensions. Pension contributions can only be carried back if they are paid and claimed by 31 January following the tax year. If you have not used relief in earlier years by 6 April 2001, then it is lost and in future years it is on a use it or lose it’ basis.

Q Oh dear – what should I do with my personal pension?

A Check with your tax office whether you have unused relief from earlier years and consider making a pension investment to use it up.

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