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P11D
benefits
On the 6 July following the end of each tax year, the employer
must provide the form P11D to the employees showing the taxable
cash equivalent of all benefits
in kind. A P11D reflects the value of benefits for the
tax year already ended. So by this time there is no longer
an opportunity for the employee to make contributions to additional
voluntary contributions (AVC) to absorb the value of taxable
benefits in kind that are pensionable
earnings.
Past
service reserve
This is a method of calculating the value of member's benefits
in a scheme. It takes account of the reserves within a final
salary pension to cover future salary increases as a result
of inflation and career progression.
Pay as you earn
For employees and directors with income tax due under schedule
E in respect to emoluments including all salaries, fees, wages
and profits, the payment of tax will be made under the pay
as you earn (PAYE) system. The employer is responsible for:
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Deducting the
correct tax and National
Insurance (NI) before paying the earnings net to the
employee or director keep a record of pay and deductions; |
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Paying the tax
and NI to the collector of taxes every month; |
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Sending
the Inland Revenue a year end return for deductions and
payments. |
By using the Inland Revenue PAYE codes
and tax tables the employer must make the appropriate deductions,
issue the employee a pay slip and pay all money owed for PAYE
and NI by the 19th of each month to the Inland Revenue. Each
year on the 19 May the employer must provide the Inspector
of Taxes form P14 for each employee showing the returns for
the year as well as form P35 and on the 6 July each year form
P9D and P11D benefits that detail the employee expenses and
benefits.
Pensions
These are schemes that will pay an income to an individual
at retirement age and are taxed as earned income. Employees,
Directors (Schedule E) and the employer can fund occupational
pension schemes or an individual may fund their own personal
pension. For a defined benefit occupational pension scheme,
the Pension Schemes Office (PSO) sets limits to the amount
of benefit that can be taken in terms of an income and tax
free lump sum, being based on the net relevant earnings
in the year prior to retirement.
For individual employees or the self-employed making contributions
to a defined
contribution scheme such as a money purchase or personal
pension, the PSO sets limits to the level of contribution
as a percentage of net relevant earnings for the current tax
year. The contributions to an exempt approved pension scheme
will qualify for tax relief but an unapproved scheme will
not.
Pensions
Act 1995
In practice, the members pension rights for divorce
cases prior to the Pensions Act 1995 could not be divided
so the former spouse would be left with no retirement benefits.
Instead offsetting
would be used against other matrimonial property, such as
the family home and the pension scheme member would be directed
to pay to their spouse a greater share of the matrimonial
property.
The courts generally had no power to order
payments to the former spouse from retirement benefits. Section
166 of the Pensions Act 1995 inserted sections 25B to 25D
in the Matrimonial
Causes Act 1973 (MCA 73) that gave the courts the power
of pension earmarking, which has applied to all divorces petitioned
since 1 July 1996 where couples in divorce were unable to
reach an out-of-court settlement. The Pensions Act 1995 permits
earmarking of the tax free lump sum at retirement, death
in service benefit, death benefits post retirement and
pensions in payment.
However, there is no provision for earmarking
of the spouses pension rights as this potentially could be
paid to someone else on the death of the pension scheme member.
The Pensions Act 1995 provides a statutory method for calculating
a value of the retirement benefits in today's terms in the
form of a cash equivalent transfer value (CETV).
This was contrary to the preferred method of family solicitors
in Scotland of using the past service reserve.
Pension
arrangements
The pension market in the UK is complex and provides for individuals,
groups, personal, occupational as well as different contribution
allowances for pension income and tax free lump sum. This
includes pension arrangements that are active for existing
members but closed to new business as they have been superceded
by a new pension regime, where concurrent membership may or
may not be available.
For example, an individual; can still contribute to section
226 policies; can still contribute to retirement annuity policies
(RAPs)
but not if they make contributions to an occupational pension
scheme; can be a member of an occupational pension scheme
with a defined benefit such as final salary or a defined contribution
such as occupational
money purchase.
A member of an occupational pension scheme cannot contribute
to a personal pension. However, since 6 April 2001 if the
member earns less than £30,000 they can contribute to
stakeholder
pensions that is derived from a personal pension regime.
Other arrangements allow the occupational scheme member to
make extra payments to enhance retirement benefits. This can
be achieved by using free standing additional voluntary contribution
(FSAVC)
schemes or additional voluntary contribution (AVC).
Public service
schemes also allow members to enhance benefits by purchasing
added years. Other more specialised arrangements include executive
pension plans (EPP)
and small self administered schemes (SSAS)
that are defined benefit and allow larger contributions, or
self invested personal pensions (SIPPs)
that offer more flexible investment choice than an insured
personal pension.
Pension
audit
This is the process to determine the value of a members pension
benefits. This involves the accurate collection of relevant
data from the members scheme; the application of appropriate
mathematical assumptions to determine a fair value for all
benefits with reference to offsetting, earmarking and pension
sharing and the presentation of these findings in a compliant
format showing a knowledge of the client and best advice given.
The pension audit will use the cash equivalent transfer value
(CETV) from the scheme administrator as the basis of the calculation
in order to produce an adjusted CETV reflecting the circumstances
and specific needs of the parties.
The pension audit should be conduced by a pensions consultant
that is a pensions
expert with a recognised qualification such as G60 Pensions
or equivalent. The parties should also have sufficient confidence
that the pensions expert is knowledgeable in the area of pensions
on divorce.
It is likely that a qualified expert would be a member of
the Society
of Pension Consultants (SPC).
Pension
credit
For pension sharing on divorce, the court must determine the
percentage to be applied to a cash equivalent transfer value
(CETV) from the provider or a suitably adjusted
CETV from a pensions expert, in order to create a pension
credit to the pension scheme member's former spouse. In a
funded occupational
pension scheme the former spouse may be made a scheme
member if dual membership is allowed.
This scheme will be subject to minimum funding requirements
(MFR)
and if the scheme is found to be in deficit, a pension credit
may be reduced by the percentage the scheme is under funded
by at the valuation date. This reduction will be applied if
the pension credit is paid as an external
transfer. However, if the former spouse is allowed dual
membership to the scheme and opts for an internal transfer,
the pension credit is unlikely to be reduced.
In the case of an unfunded public service scheme an external
transfer is not permissible, therefore the former spouse must
apply the pension credit to an internal
transfer. An unfunded scheme does not need to comply with
the MFR as benefits are guaranteed by statute and therefore
a deficit to the scheme member can never occur.
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