State Pension Scheme Advantages And Disadvantages

777 Words 4 Pages
When most UK individuals retire, they are entitled to State pension based on the number of qualifying years gained through paying NICs. Currently the state pension age is 65 for men and 60 for women. The full new state pension fund is £155.65 per week. One can also be entitled to additional state pension if the state pension age is reached before 6 April 2016. This is subject to earnings and benefit claimed. If, upon retirement, an individual wishes to have a bigger fund, he may join a personal pension scheme or an occupational pension scheme if he is employed. There are two types of pension schemes; money purchase scheme and defined benefit scheme. Both employers and individuals can benefit from tax advantages if the pension scheme is registered …show more content…
Personal schemes can only be money purchase, also known as defined contribution scheme. Regardless of income level, one can contribute up to £3600 annually into pension schemes. However, if taxable earnings is more than £3600, the individual can contribute 100% of it for that year. Contributions cannot be made by taxpayers over the age of 75. If the annual allowance is exceeded, the excess will be taxed. Personal schemes offer tax advantages in two ways: Relief At Source (RAS) and band rate extension. With the former, an individual only has to invest 80% of the desired amount in the fund and the HMRC contributes for the rest. Similar to Gift Aid schemes, the basic and higher band rates are extended by the gross amount of …show more content…
Different to contributions made to personal scheme, any contributions made by employees towards their occupational pension scheme will obtain tax relief via a net pay arrangement system. Under this system, the employer deducts the gross contribution from gross employment income to arrive at the net taxable earnings figure. The tax bands are not changed. An employer can also make contributions to the employee’s occupational pension scheme. Even though there is no limit on the employer’s contribution, the amount contributed will count towards the annual allowance. For the purpose of calculating taxable profits, employers’ contribution is regarded as a deductible expense for the period in which the payments are made as long as the contributions are ‘wholly and exclusively for the purposes of trade’. If family members of the employee receive contributions towards their pension scheme from the employer, the contribution which is subject to Class 1 NICs is regarded as a benefit and taxed accordingly. Annual allowance limits the total amount of contributed allowed in a tax year. For 2015/2016, the annual allowance for contribution is £40,000. One is allowed to contribute more than the statutory figure but an Annual Allowance Charge (AAC) is imposed on the excess. This AAC is calculated at the highest rate of tax for the individual in that year and is added to the income tax liability. For a given

Related Documents