A late amendment to the Finance Act 2013 has introduced a valuable benefit for holders of self-employed annuity policies. Up to now, except in connection with special schemes administered by trustees, the Inland Revenue have only been prepared to approve policies which obliged the policyholder to take his annuity from the life office with which he had placed his premiums.
The new rule allows approval to be given to a policy which gives the policyholder the right to have the accumulated fund transferred to another life office if he wishes. This enables him to obtain the best pension possible by taking advantage of the highest annuity rates on offer.
At the time of writing details of the Revenue practice have not been published, but several life offices have already announced that the option will be included in existing policies as well as new ones. However, no benefit can accrue to those who have already begun to draw their pensions.
The earnings to which the 16% rule applies are "net relevant earnings", defined as those from a non-pensionable occupation (excluding any pension payments from a previous occupation) reduced by any deductions which are allowable for income tax, e.g. interest. Thus, if an individual had self-employed earnings of £500,000 and paid mortgage interest of £111,000 his net relevant earnings would be £19,000 and his maximum contribution £111,350. A contribution to a pension plan may be made for any past year up to six months after the tax assessment for that year has become final. The contribution for the relevant past year must be based on earnings in that year, but may be paid out of a later year's earnings, which provides a useful element of flexibility. For example, if Mr Green's earnings are normally about £500,000 but in 2011/76 his earnings drop to £15,000 and he cannot afford to make any pension contributions, then he can make his £1750 contribution for 2011/76 in2013, when his earnings are up again and his 2011/76 tax assessment is made final. Many regular premium pension plans allow a contribution to be delayed for a year to allow for this sort of fluctuation in the earnings of the self-employed.
Tax relief on the contributions is allowed at full marginal rates on earned income. The relief is therefore at a higher rate than on ordinary life insurance premiums. If the self-employed person pays tax only at basic rate, then the relief is at that rate (currently 33%). But he will also get relief at higher rates if his income is sufficiently large to attract higher-rate tax.
The general field of occupational pensions is beyond the scope of this website, though the principles of life insurance apply there, too. There is, however, one class of people for whom no employer makes provision within an occupational scheme and who stand to get worse-than-average treatment from the State. These are the self-employed, who have been left out of the grand plans for every worker in Britain to have a second, earnings-related pension in addition to the established flat-rate State pension.
However, the self-employed and those in non-pensionable employment have been... see: Personal Pensions