The period for responding to the government's consultation brief of 16 September on stakeholder pensions came to an end last month. As Richard Baron suggested in this column (7 October, page 12), I expect most comments have been favourable. I also expect full marks to have been awarded to the Inland Revenue for consulting so widely after issuing the Green Paper in December 1998, then listening to what people have said and radically simplifying the proposals as a result. I expect there has been a strong reaction against the idea to end the carry-forward/carry-back provisions for personal pensions as part of the simplification process, and replace it with a five-year rule. My firm certainly criticised it. I should first explain what carry-forward/carry-back rules mean. Broadly, they allow an individual to make good any underpayment of contributions in year one, by either: - paying a contribution in year two and carrying it back for relief in year one; or - paying it in any of years two to seven and relieving it in that year, providing the full entitlement for that year has first been paid. These rules have been criticised as too complex and I agree. What has been proposed as an alternative is that: - contributions should only be allowed in the year in which they are paid; but - contributions should be allowed to be paid for five years after the business has ceased as though earnings had continued at the same level as at the time of the cessation. The carry-forward/carry-back rules are there for the good reason that the self-employed often don't know how much they have earned until after the year end, or may be unable to afford to pay contributions until a later year. This produces contribution backlogs, particularly for those with an accounting date of 31 March - unfortunate given that the current-year basis encourages people to have that accounting date. Clearly the five-year alternative lacks logic. On the one hand, for instance, those without any backlog have a bonus contribution entitlement for five years. On the other, the compensation is liable to be inadequate for those whose earnings have declined prior to cessation and have a backlog from years of high earnings. So what should we have in its place? I would like to set the ball rolling by making certain suggestions that may point to a way forward. One possibility is that carry-back alone should be abolished as this often causes the earlier year to be reopened and produces the most practical difficulties. As compensation, carry-forward could be made much simpler by having a pool of unused relief which could be carried forward without restriction. (At present it can only be relieved once contributions have been paid on current-year earnings, and it is lost if it has not been used up within six years.) An individual would then simply show the following on his or her tax return: - his unused relief brought forward; - plus the maximum contribution that his pool of current year's earnings would justify; - less contributions he has paid in the year; - leaving his pool of unused relief carried forward. There is still a risk of an unused backlog of relief in the year in which the business comes to an end. One way of reducing this problem would be to allow relief in, say the following two or three years against total income (and possibly gains), not just earnings. I do not pretend these suggestions are ideal. In particular, they would prevent someone from getting relief at the same rate at which his earnings were taxed, as is presently possible by carry-back. Nevertheless, I put it forward as a contribution to the debate. I emphasise that, like the government, I would like to see an end to the present carry-forward/carry-back rules as a simplifying measure. It ought to be possible to find a middle way between the complexity of those rules and the wayward effects of the alternative five-year proposal. If it isn't, I would say we should stick with the current regime. - Maurice Parry-Wingfield is tax director at Deloitte & Touche.
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