Relevant
benefits
As specified in section 612 of the Income and Corporation Taxes
Act 1988 (ICTA
88) and practice notes (IR12 (1997)) relevant benefits are
used to describe the benefits derived from and subject to taxation
governing an occupational pension scheme. Relevant benefits
will be any financial gain to the scheme member that is related
to retirement benefits, or the ending of the period of employment.
This employment could include continuous
service whereby the member has worked for a number of connected employers pension
scheme. Death in service benefit is also a relevant benefit
although excluded is accidental death or disability during employment.
Relevant
earnings
As defined in the Income and Corporation Taxes Act 1988 (ICTA
88) relevant earnings include any income that is chargeable
to UK tax as:
Income from
a property related to the taxable emoluments of employment;
•
Income chargeable
to income tax under schedule D after deducting business
expenses arising from a trade, profession or vocation
as an individual or partnership;
•
Income from
patent rights and treated as earned income;
•
Income from
certain commercial lettings of holiday accommodation assessed
for tax after 1995/96 under schedule A.
Restricted
activity rules
The Financial Services and Markets Act 2000 (FSMA) requires
a designated professional body to make rules, which have to
be approved by the Financial Services Authority (FSA).
An exempt professional
firm must carry on, and hold itself out as carrying on,
only regulated activities allowed by these rules.
Retail price index
A cost of living index has been published since July 1914 and
the retail price index (RPI) was first introduced in 1947. The
RPI is expressed as a percentage of price levels at a given
time relative to a previous date, called the reference date.
This date has changed five times since 1947 and the base point
of 100 is currently January 1987.
The Office
for National Statistics (ONS) compiles the RPI, which is
the main domestic measure of inflation in the United Kingdom
and measures the average change each month in the prices of
goods and services purchased by most households in the UK. Although
the RPI covers the whole of the UK, expenditure of certain higher
income households and pensioners that are mainly dependent on
the state basic pension are excluded.
To compile the RPI the prices of over 600 separate goods and
services are regularly measured in 146 locations throughout
the United Kingdom. In total some 20,000 outlets are selected
producing 130,000 separate price quotations that are combined
to produce individual indices for each year. These item indices
are combined as a Laspeyres price index to create the UK retail
price index.
The Laspeyres price index is weighted using items from the family
expenditure survey and are updated each year. The basket of
goods and services are also revised each year and the list of
outlets and locations are revised and rotated every five years.
RPI
escalation
For an individual that retires and wants a guaranteed income
for the rest of their life from a pension
annuity (compulsory purchase annuity) connected with a pension
fund or a purchased
life annuity, RPI escalation can be added to maintain its
value in the future, it needs to rise with inflation.
This means that the annuity must be indexed-linked to the Retail
Price Index (RPI). Alternatively, the pension annuity could
also be escalated by limited
price indexation (LPI) which is inflation rises limited
to a maximum of 5% growth and this basis is used for any portion
of the pension fund containing protected
rights benefits.
It is also possible to have fixed rate annuity rather than RPI
escalation. The cost of RPI escalation depends on inflation
and therefore could be cheaper or more expensive than a fixed
rate escalation, but certainly more expensive than a level
annuity.
At retirement the individual can use a pension 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 pension annuities quote offering guaranteed rates.
Where the annuitant wants the high income of level annuities
but growth in the income, a with
profits annuity could be an option. By selecting an Anticipated
Bonus Rate (ABR) of between 1.0% and 3.0% the annuitant will
receive more income than escalating rates and the potential
for income growth when declared bonuses are greater than the ABR.
Retirement
age
In
an occupational pension scheme such as a final
salary pension, a member must retire and take the retirement
benefits at the retirement age selected by the scheme trustees. There will be the possibility for early retirement but the member
will pay a penalty for doing so, usually expressed as a percentage
reduction of benefits for each year of early retirement. Reductions in the pension income would apply which reflect the greater period of time the income would be in payment.
Retirement
before the age of 50 is only possible if an individual has a
special occupation as agreed by the Inland Revenue, such as
a professional sportsman or if the member is part of the Armed
Forces Pension Scheme or because of incapacity.
A member of a personal pension or stakeholder pension will be
able to select their retirement age, which must be between 50
and 75 and at retirement age the individual can use the pension fund to buy an annuity where the annuitant has the option to use an open market option to search for the highest pension annuities. 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. At the age of 75 the scheme member must purchase a pension
annuity (also called a compulsory purchase annuity).
Retirement
annuity policies
Personal pensions were introduced from 1 July 1988 but prior
to this date an individual could make contributions to retirement
annuity policies (RAPs). The RAPs are approved under Chapter
III of Part XIV of the Income Corporation Taxes Act 1988. Being
very similar to personal
pensions, RAPs contributions qualify for full tax relief
and the pension fund will grow free of tax on investment income
and capital gains tax. There is also the possibility for commutation
to a tax free
lump sum at retirement age.
However, retirement age is restricted to between 60 and 75.
Both carry
back relief and carry
forward relief is available and retirement annuity policies
are unaffected by the restrictions imposed on personal pensions
from 6 April 2001. Any existing RAPs member can continue to
make contributions towards them until their actual retirement
age.
Retirement
benefits
The scheme member may have a number of retirement benefits at
retirement age depending on whether it is a defined benefits
scheme, defined
contribution scheme, public service scheme or private sector
scheme. In general a pension income could be provided by a compulsory
purchase annuity, a pension
drawdown or guaranteed by statute if a public service scheme.
Final salary pensions usually provide spouses and
dependents pension automatically in the retirement benefits. In addition for a defined
benefits scheme the pension income may include the benefit of escalation
to protect against inflation such as limited price indexation (LPI).
The member of a defined contribution scheme
such as a stakeholder pension or SIPP could include spouses pension rights or a pension income for
other dependents such as children, provided on the death of
the member. A spouse's benefit would be a proportion, typically either 50% or 100% of the annuity income. For a pension
annuity the income may include the benefit of escalation
to protect against inflation such as the retail price index
(RPI) or a fixed escalation of 3% or 5%.
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 all the features necessary such as spouse's income, escalation and frequency of payment. 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.
Revaluation
Applying specifically to an occupational pension scheme, revaluation
refers to indexing
benefits relating to early leavers. This means a scheme
member will have their preserved benefits revalued in line with
the retail price index (RPI) with a maximum of 5.0% per annum
to protect against inflation.
Since the Pension Schemes Act 1993 (PSA 93) the guaranteed
minimum pension (GMP) part of a contracted out schemes preserved
benefits, has been subject to a minimum level of revaluation
that applies to both private sector employers and public
services schemes. GMP accrued from 6 April 1993 up to 5
April 1997 of preserved benefits must have a revaluation equal
to the average earnings index (AEI) of 7.0% and from 6 April
1997 this is reduced to the RPI or a maximum of 5.0% a year.
