Understanding Tax Relief
The majority of individuals when offered the chance to contribute to an occupational pension scheme will do so. Occupational schemes present a number of attractive benefits to both the employer and the employee; from the employee’s point of view, they have an easy and often cost-effective method by which they can save for retirement, and one to which they are required to give very little thought. For an employer, the major benefits include tax relief on any contributions that they make to their employees’ funds.
The benefit of tax relief is not, however, available on all schemes. Rather, pension schemes must fulfil a set of requirements in order to qualify for the full range of relief available from the Inland Revenue.
Approved and Unapproved SchemesBroadly speaking, pension schemes can be divided into two groups: approved and unapproved schemes. The majority of schemes to which employees will have access will fall into the first of these categories. Essentially, the concept of the ‘approved’ scheme was devised in an effort to protect employees’ pension funds.
The government recognised that there was the capacity for pension providers to invest employees’ money in high-risk vehicles, which obviously leads to the possibility of the investor making a loss. In order to counteract this possibility, the Inland Revenue now vets all pension schemes being offered to employees, and those which are deemed secure enough gain ‘approved’ status. In order to encourage employers into offering only approved occupational schemes, the government offers high levels of tax relief on these types of pension. Conversely, unapproved schemes will not be eligible for the full range of relief.
Occupational pension schemes that have been approved by the Inland Revenue are, by and large, the best choice for most employees. They offer relative security for your money (although public confidence in occupational pensions has been somewhat diminished as a result of the recent ‘pensions crisis’), and often effectively double your investing power as a result of the contributions made by employers. Again, this occurs mainly because it is advisable from a tax-efficiency point of view for them to make these contributions.
Unapproved BenefitsEven when the lack of tax relief available for unapproved schemes is taken into account, there are a still a number of circumstances in which it may be advisable to make use of this type of pension. While these schemes are not sanctioned by the Inland Revenue as a result of their high-risk nature, it is precisely this facet of them that makes them potentially attractive to some investors. Unapproved schemes generally have far less stringent investment limits, and many positively encourage the fund holder to invest themselves.
Furthermore, they often include provision for the fund holder to purchase business property or machinery with the intention of then leasing it on. This makes many unapproved schemes particularly attractive to business owners or shareholding directors. Finally, some unapproved schemes can be used as a ‘top-up’ by those who have already reached the maximum contribution limit on their approved scheme.