Why we need to carry on topping up

Making pension contributions when it suits you saves money. But, says Michael Royde, that flexibility may soon vanish

I have talked to a number of my clients, mainly top rate taxpayers, and asked, "Have you read the Government's proposals for stakeholder pensions?" Without exception the answer has been no. They do not think it applies to them. Yet the proposals abolishing the right to carry forward and carry back contributions will apply to existing personal pension plans ­ and reduce these plans' flexibility and advantages.

I have talked to a number of my clients, mainly top rate taxpayers, and asked, "Have you read the Government's proposals for stakeholder pensions?" Without exception the answer has been no. They do not think it applies to them. Yet the proposals abolishing the right to carry forward and carry back contributions will apply to existing personal pension plans ­ and reduce these plans' flexibility and advantages.

Paragraph 15.3 of the Government's consultation brief, Stakeholder Pensions, Number Six, says: "The Government therefore feels that the new rules will offer sufficient flexibility and the complicated carry forward/carry back rules should be abolished to simplify the system and reduce administration costs. This would have effect from April 2001."

The optional carry back system allows taxpayers to have their pension contributions in one tax year treated as though they were made in the previous year. Carry forward allows taxpayers, in the current tax year, to make use of unused relief from the previous six years (allowing a large lump sum contribution, when it can be afforded).

These two systems mean that if your annual earnings vary, you can top up your pension contributions in good years and exceed the annual contribution limits on which tax relief can be claimed.

Many pension plan holders find carry forward and carry back is a luxury they cannot yet afford, or do not fully understand. But for others, making use of unused pension contributions in years when earnings were poor so as to increase contributions in bumper years when they can be set against top-rate tax, is a vital concession. And it could become more important as earnings become more volatile.

The concession is relevant to many professional people, especially solicitors and accountants whose incomes fluctuate from year to year. It can also apply to individuals, such as dentists and self-employed plumbers, locksmiths and electricians, whose earnings may peak quite early in their careers. Many sales persons who are commission-based also make contributions in good years and none in bad. The abolition of the system would adversely affect them, too.

The Inland Revenue argues that because only 5 per cent of personal pension plan holders make use of these "complicated" arrangements, they can be abolished, thereby simplifying the system and cutting administrative costs. However, most accountants and tax advisers now use computerised programmes to tackle the system.

The Government's plan is to introduce a "five-year continuation facility" allowing people to contribute up to £3,600 a year to a pension in the five years after they have stopped earning or retired. But while this may be helpful to relatively low earners, it is not an acceptable substitute for the majority of people who have used carry back and carry forward in the past, and will now lose out. Abolition, indeed, sounds suspiciously like yet another example of a back-door increase in taxation for the self-employed, hidden in proposals that few people will read. And the rules for the self-employed also apply to members of group personal pension plans, that, increasingly, are adopted by companies as a cheaper alternative to final salary pension schemes.

The number of self-employed who do use carry forward and carry back (about 5 per cent) are among the leading job creators. They need to be encouraged. Many who are starting a new business will not be able to afford pension contributions in the early years, and as they prosper they need to be able to catch up ­ a possibility that will end under the proposed changes.

Under the proposals limited companies with executive pension plans, or the "small self administered schemes" that allow large single premiums to be made, will still be able to catch up on pension contributions by making larger contributions in good years and taking advantage of the flat tax-rate concession. But individual self-employed workers, and employees who do not have final salary pension schemes, may suffer. Financial downturn caused by interest rate rises or alteredcircumstances, can all affect individuals' ability to make full use of pension contribution allowances each year.

The deadline for registeringcomments on the tax aspects of stakeholder proposals is 29 October. If the Government's proposals do go unchallenged, existing personal pension plan holders will suffer a rude awakening in April 2001 when carry back and carry forward disappear. If you are concerned, you could write now to your professional trade body or MP, or contact Jeff Williams at the Inland Revenue, 134, New Wing, Somerset House, Strand, London WC2R 1LB. Or email stakeholder.ir.sh@gtnet. gov.uk.

Michael Royde is an independent financial adviser with offices in Ringwood, Hampshire and London