BN 19 - Simplification of the Taxation of Pensions

Who is likely to be affected?

1. Pension scheme savers, employers, insurance companies, occupational and personal pension schemes and their advisers, and financial advisers.

General description of the measure

2. The simplified tax regime for pensions comes into effect on 6 April 2006 (A-Day). From that date, there will be a single set of tax rules for all taxadvantaged pension schemes. The relevant legislation is contained in Finance Acts 2004 and 2005, and accompanying regulations.

3. These new measures build on those in Finance Act 2004, providing additional flexibility and protection for schemes and individuals, clarifying aspects of the new regime and introducing further necessary antiavoidance and compliance rules.

Operative date

4. Will have effect from 6 April 2006.

Current law and proposed revisions

5. Pension savings are currently governed by various different tax regimes limiting the amount that an individual can contribute to a tax-advantaged pension scheme and the consequent benefits that a scheme can pay out. Pensions simplification will replace the existing tax regimes with a single universal regime for tax-privileged pension savings. The numerous controls in the current regimes will be replaced by two key controls in the new regime:

• the lifetime allowance of £1.5m on tax privileged savings, rising to £1.8m by 2010; and
• The annual allowance of £215,000 for savings in a tax privileged pension scheme, rising to £255,000 by 2010.

6. New measures were announced on the HMRC website at
http://www.hmrc.gov.uk/pensionschemes/pts.htm and in the HMRC Technical Note published alongside the Chancellor’s Pre-Budget Report on 5 December 2005. These include measures to stop the potential abuse of the pension tax simplification rules in Finance Act 2004. The anti-abuse
measures include:

• tightening the rules for self-directed pension schemes to remove the tax advantages for investing in residential property and certain other assets such as fine wines, classic cars, art and antiques; and
• preventing individuals from artificially boosting their pension funds by recycling tax-free lump sums with the removal of tax advantages. Following comments received on the draft legislation a revised version can now be found on the HMRC website. The rule will not be triggered where no more than 30% of the lump sum is recycled, and the threshold under which lump sums of less than £15,000 will not trigger the rule will be linked to the standard lifetime allowance. HMRC has also made numerous changes to the draft guidance on the legislation, which is also now available on their website.

Further advice

7. An updated full regulatory impact assessment “Simplifying the taxation of pensions” is also published today.

8. If you have any questions about these measures, please contact the pensions helpline on 0115 974 1600.