Pensions Tax Simplification Newsletter No 10 February 2006

1. Introduction
2. What will be available at A-day
3. Ten things to be aware of
4. How you will claim relief at source after A-day
5. Interest on short service refunds
6. Block transfers
7. Overseas transfers
8. Policy Update
9. Contact us

1. Introduction

This is the tenth edition of the Pensions Tax Simplification Newsletter. The Newsletter keeps pension providers, employers and savers informed of new developments before A-Day. If you are a pension provider or an employer, please make sure that the appropriate people in your organisation read it.

2. What will be available at 6 April 2006

We have provided at Annex A (PDF 60K) a chart which details how you transact with us from 6 April 2006. It lists what you can do using Pension Schemes Online, what forms can be used as an alternative if you are unable to use the online service, and who can submit or send in that form to Audit & Pension Schemes Services.

3. Ten things you need to be aware of before 6 April 2006

3.1 The Scheme Administrator is the person(s) appointed in accordance with the pension scheme rules to be responsible for the discharge of the functions conferred or imposed on the scheme administrator of the pension scheme by and under Part 4 of Finance Act 2004. The Scheme Administrator has responsibility for all tax charges, interest and penalties for a registered pension scheme, see Newsletter No 1. Who is the Scheme Administrator for your scheme? Do they know that after A-Day if they go online and add themselves as Scheme Administrator, they will have access to all the online functionality including being able to authorise a practitioner?

3.2 All Scheme Administrators of schemes must ensure that records are kept properly to ensure that they can make complete and correct reports and returns should they be required to either by legislation or by notice. Make sure you are collecting and keeping the information needed for the Accounting for Tax return , the Event Report and the Registered Pension Scheme Return

3.3 Individuals have three years from A-Day in which to notify HMRC of their intention to rely on either Primary or Enhanced Protection.

3.4 From A-Day, APSS will no longer have the discretion it does under the current regime. Everything is set in legislation, which also sets out the tax consequences of any unauthorised payments. Scheme Administrators and Practitioners should check the legislation and guidance to see what they need to do and what are the consequences.

3.5 Scheme rules rule – it is up to trustees , employers and those who run schemes, to change the scheme rules in order to take advantage of the new legislation.

3.6 Online services – to use the Pension Schemes Online service, users will have to first pre-register to use the service. You will then be provided with your Scheme Administrator or Practitioner ID and an activation token. You will then be able to complete the registration process online to obtain your User ID and set your own password. You don’t have to do this straight away on 6th April 2006, but you should consider doing it as soon as possible after then. Practitioner organisations might like to consider making use of the facility available through the Government Gateway www.gateway.gov.uk for setting up ‘Assistants’ for the Pension Schemes online service. Each Assistant created is allocated an individual ID which can be deleted if the Assistant subsequently moves on.

3.7 Member information – do the members of your scheme know what the new rules mean to them? If not and you are not offering certain elements of simplification, will they be coming to you to ask why they can’t have a 25% tax free lump sum or why they can’t take their benefits and carry on working?

3.8 Scheme wind-up is potentially the first thing that you will have to report. Any Scheme Administrator of a scheme wound-up after A-day will have to submit an Event Report to notify winding-up along with any other reportable event within 3 months of the winding-up. The Scheme Administrator is responsible for this, but who in practice is going to provide the information required on the Event Report?

3.9 Schemes wishing to obtain approval under the current rules must submit an application to APSS Nottingham by 30th June on the appropriate existing form. Following approval, these schemes will then automatically be regarded as registered schemes at A-Day.

3.10 A-Day means new opportunities for all. This includes (subject to scheme rules);

There are no limits on the amount an individual can contribute to a pension scheme
A UK taxpayer can get tax relief on contributions of up to 100% of their UK earnings
All employees will for the first time be able to take some or all of their benefits and carry on working in their current jobs.

4. How you will claim relief at source after 6 April 2006.

From 6 April 2006 Savings & Pension Schemes (SPS) office at Bootle will no longer be responsible for making repayments of tax relief to Registered Pension Schemes operating "relief at source" arrangements on member contributions. Instead, this work will be carried out in the Audit & Pension Scheme Services (APSS) office at Nottingham.
The following transitional arrangements will apply:-

Claims for periods up to 5 April 2006

Interim claims (PP10)

Scheme Administrators should continue to submit interim claims for all months up to 5 April 2006 to SPS (Bootle), and should continue to use the current version of PP10.

Annual claims PP14 and annual statistical returns PP14(Stats)

Scheme Administrators should submit both their annual claim and annual statistical return for the tax year to 5 April 2006 to SPS (Bootle) and should continue to use the current versions of forms PP14 and PP14(Stats) respectively.

Claims for periods from 6 April 2006

Interim claims

Scheme Administrators should submit interim claims for periods after 6 April 2006 to APSS (Nottingham). Claims should be made on the new version form APSS 105 which will be on the Pensions Simplification pages of the HMRC website for Scheme Administrators to download, in time to make their monthly interim claim for the month to 5 May 2006 and subsequent months.

Annual claims

Scheme Administrators should submit both their annual claim and annual statistical return for the tax year to 5 April 2007 to APSS (Nottingham) using the new version forms APSS 106 and APSS 107 respectively. The new version forms will be available on the Pensions Simplification pages of the HMRC website after 5 October 2006.

The above changes will not affect the timing of repayments to Scheme Administrators or the method of payment to them (BACS).

5. Interest on short service refunds

There is no requirement on scheme administrators to account for tax on the interest on short service refunds. The interest can be paid gross and the individual must return the interest on their own self-assessment return, or they should notify HMRC of any chargeability if there is no notice to make a return. Further information on the taxation of short service refunds is contained in RSPM04101090

6. Block transfers

A block transfer is a transfer in a single transaction of all the sums and assets held for the purposes of (or representing accrued rights under) the arrangements under the pension scheme from which the transfer is made. It must relate to the member in question and at least one other member of that pension scheme.In addition before the transfer it is a requirement that either the member was not a member of the pension scheme to which the transfer is made, or they have been a member of that pension scheme for no longer than one year.

For those individuals who in the scheme have a right to take their pension before normal retirement age (FA04 Schedule 36 Paragraphs 21- 23) or have an entitlement to a lump sum exceeding 25% (FA04 Schedule 36 Paragraphs 31- 34) this entitlement will be lost after A-Day if they transfer their rights to another scheme other than via a block transfer.

So for example where an individual transfers their rights from Scheme A to Scheme B and they were the only member to transfer their rights to Scheme B at that point in time, then this would not constitute a block transfer and any entitlement above would be lost. This would be regardless of whether or not other members of Scheme A were at the same time transferring their rights to another scheme, Scheme C or whether Scheme A was in wind-up.

The only exception to the individual losing their entitlement unless the transfer is a block transfer will be if an existing occupational pension scheme that becomes a registered pension scheme on 5 April 2006 winds up, which will be covered in a further regulation. In this case the member may have their rights transferred to a deferred annuity contract that satisfies section 74(3)(c) Pensions Act 1995. See 1A of the additional regulations note

7. Overseas transfers

Members and administrators of approved schemes who are arranging a transfer to an overseas scheme need to be aware of the new rules that will apply to transfers that are made after 5 April. Such transfers will give rise to an unauthorised payments charge and a scheme sanction charge if the receiving scheme is not a "qualifying recognised overseas pension scheme" (QROPS).

Transfers to schemes established in Ireland, the Isle of Man, Jersey and Guernsey will be subject to the new rules in the same way as other overseas schemes. It was announced on 22 February that our reciprocal transfer agreements with those jurisdictions will be terminated with effect from 6 April.

An overseas scheme can become a QROPS by notifying HMRC that it meets certain conditions and by providing certain undertakings. Those conditions are specified in Statutory Instrument 2006/206 that was made available on our website on 3 February. A notification cannot be made until 6 April so it will not be possible to know if an overseas scheme is a QROPS before then. But after that UK scheme administrators and members will be able to check if a scheme is a QROPS with HMRC by writing to Audit and Pension Scheme Services, Yorke House, Castle Meadow Road, Nottingham NG2 1BG.

There is guidance on transfers to overseas schemes in chapter 14 of RPSM which is being revised to take into account changes to the draft regulations that became SI 2006/206. There is also guidance on the effective date of a transfer at RPSM11104860.

A transfer to a QROPS will be a benefit crystallisation event and the sums and assets transferred will be tested against the individual's lifetime allowance to see if a lifetime allowance charge arises. The amount of the lifetime allowance will be £1.5 million during 2006/07.

8. Policy update

The following regulations were laid during February

The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Scheme) Regulations 2006 no. 206
An overseas pension scheme is a bona fide non-UK pension scheme. Contributions to a scheme which meets the definition of an “overseas pension scheme” may be eligible for UK tax relief. So tax relief will be available for example where foreign workers come to work in the UK and continue to make contributions to their home schemes. And if a non-UK scheme meets the definition of a “recognised overseas pension scheme” this will allow a transfer of a member’s rights to it from a registered pension scheme.
These Regulations prescribe the requirements which must be satisfied to enable a pension scheme to be—

an overseas pension scheme, and
a recognised overseas pension scheme,

for the purposes of Part 4 of the Finance Act 2004.

The Pension Schemes (Information Requirements – Qualifying Overseas Pension Schemes, Qualifying Recognised Overseas Pension Schemes and Corresponding Relief) Regulations 2006 No. 208
An overseas pension scheme is a bona fide non-UK pension scheme. Contributions to a scheme which meets the definition of an “overseas pension scheme” may be eligible for UK tax relief. So tax relief will be available for example where foreign workers come to work in the UK and continue to make contributions to their home schemes. And if a non-UK scheme meets the definition of a “recognised overseas pension scheme” this will allow a transfer of a member’s rights to it from a registered pension scheme.

These Regulations prescribe the information which—

a qualifying overseas pension scheme, and
a qualifying recognised overseas pension scheme

must undertake to provide to Her Majesty's Revenue and Customs, and the time limits by which the information must be provided.

The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 No. 207
A scheme is a relevant non-UK scheme if—

relief from tax has been given in respect of contributions paid under the scheme by virtue of the legislation and the relief has been given at any time after 5th April 2006 by double tax arrangements,
a member or members of the scheme have been exempt from income tax by virtue of section 307 of Income Tax (Earnings and Pensions) Act 2003 at any time after 5th April 2006 when the scheme was an overseas pension scheme, or
there has been a relevant transfer at any time after 5th April 2006 when the scheme was a qualifying recognised overseas pension scheme.

These Regulations serve two purposes—

to provide a method of computing the amount to be charged to UK tax in respect of a payment by a relevant non-UK pension scheme; and
to modify the provisions of Part 4 of the Finance Act 2004 (“the Act”) to ensure that the new regime for registered pension schemes works in the context of relevant non-UK schemes.

The Registered Pension Schemes (Authorised Payments) Regulations 2006 No. 209
Section 164 of the Finance Act 2004 lists the payments which a registered pension scheme is authorised to make to or in respect of a member of the pension scheme. It also provides for regulations to be made which may prescribe additional categories of authorised payment. These Regulations prescribe as authorised member payments—

lump sum payments arising from the commutation of equivalent pension benefits pursuant to the Occupational Pension Schemes (Assignment, Forfeiture, Bankruptcy etc.) Regulations 1997, or the Occupational Pension Schemes (Assignment, Forfeiture, Bankruptcy etc.) Regulations (Northern Ireland) 1997, and
payments of state scheme premiums pursuant to section 55 of the Pension Schemes Act 1993, or section 51 of the Pension Schemes (Northern Ireland) Act 1993.

The Employer Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations 2006 No. 210
The tax provisions that will apply from 6 April 2006 to employer-financed retirement benefit schemes, which are schemes that are not registered pension schemes, mean that some non-accidental death lump sum benefits from injury or compensation schemes which are currently not taxed would become taxable. These Regulations ensure that non-accidental death lump sum benefits provided under the rules of a scheme on the date these regulations come into force are “excluded benefits” and are therefore not subject to income tax.

The Pension Schemes (Relevant Migrant Members) Regulations 2006 No. 212
Schedule 33 to the Finance Act 2004 contains provisions about migrant member relief in respect of contributions to overseas pension schemes. Paragraph 4 of that Schedule sets out the conditions an individual member of an overseas pension scheme would need to satisfy in order to be considered a relevant migrant member of that scheme. These Regulations prescribe an alternative condition to that already contained in paragraph 4(c) of Schedule 33, so that an individual can qualify as a relevant migrant member of an overseas pension scheme if he was entitled to tax relief on contributions paid under the pension scheme in the country of residence at any time in the 10 years prior to coming to the United Kingdom.

The Registered Pension Schemes (Surrender of Relevant Excess) Regulations 2006 No. 211
Section 218 of the Finance Act 2004 provides that an individual has a standard lifetime allowance on the amount of pension savings that may benefit from tax relief. Schedule 36 to the Finance Act 2004 contains transitional provisions for pension rights at 5th April 2006 and provides for enhanced lifetime allowance protection. This means there is no liability to the lifetime allowance charge to income tax if an individual has one or more relevant existing arrangements provided notice of intention to rely on enhanced protection has been given to Her Majesty's Revenue and Customs. Notice of intention may not be given unless the individual surrenders any relevant excess rights as determined by regulations. These regulations specify the rights to be treated as representing relevant excess rights.

The Registered Pension Schemes (Modification of Rules of Existing Schemes) Regulations 2006 No.365 and
The Registered Pension Schemes (Unauthorised payments by existing schemes) Regulations 2006 No. 364
These regulations operate so as to treat a number of features of the existing taxation regime as being automatically imported into the rules of schemes which are in existence on 5th April 2006 and which become subject to the regime for registered pensions schemes on 6th April 2006 by virtue of paragraph 1 of Schedule 36 to the Finance Act 2004. Their principal effect is to preserve the status quo in relation to the application of rules which expressly or by necessary implication limited benefits, liabilities or entitlement to make contributions.

Without the modifications, schemes which had relied upon limits laid down (for example) in Part 14 of the Income and Corporation Taxes Act 1988 to restrict such benefits, liabilities or entitlement may have found themselves having difficulty reconciling competing pressures for funds. Therefore, where a scheme would (but for the Regulations) have had to make a payment in excess of a limit which applied before 6th April 2006, the trustees are instead given a discretion to make such payments. Where they do exercise that discretion the payments so made are, by virtue of the Unauthorised Payments Regulations, not scheme chargeable payments (under the new taxation regime for pensions) to the extent that they are referable to entitlement accrued, or contributions paid, prior to 6th April 2006. Similar payments made by schemes to which the Modification Regulations do not apply, or to which they have ceased to apply, are treated in the same way.

9. Contact us

If you have any questions about anything to do with Pension Tax Simplification please contact our helpline number 0115 974 1600 or 0115 974 1777 (9.00 to 17.00 Monday to Friday)

If you have any comments about our newsletters then please contact:

Paul Cottis
Audit & Pension Schemes Services
Yorke House
Castle Meadow Road
Nottingham
NG2 1BG
0115 974 1692