RPSM02100070 - Technical pages: Registering a pension scheme with HMRC: pension schemes which exist at 5 April 2006: Modifying the rules of existing pension schemes

Modifying the rules of existing pension schemes

From 6 April 2006, the new tax rules in Part 4 of Finance Act 2004 replace the tax rules for the tax approval of pension schemes. The change in the tax rules can possibly affect the rules of an existing pension scheme that automatically becomes a registered pension scheme (see RPSM02100020) in one or both of the following ways:

• the rules of the pension scheme might have a provision that allows for a payment that was acceptable for tax approval purposes but will be an unauthorised payment under the new tax rules,
• limitations in terms of benefits payable from the scheme and contributions that could be paid into the scheme, which those running the scheme might want to retain, could be compromised because those limitations relied on aspects of the tax approval rules that are removed as the new tax rules take effect on 6 April 2006.

The Registered Pension Schemes (Modification of the Rules of Existing Schemes) Regulations 2006 [SI 2006/364] have the effect of treating a number of features of the tax approval rules as being automatically imported into the rules of existing pension schemes that automatically become registered pension schemes on 6 April 2006. The effect is to preserve the way in which the scheme rules were applied before 6 April 2006, in conjunction with the tax approval rules that applied before that date.

For example, the rules of a tax approved retirement benefits scheme may have a provision to the effect that a member’s pension is measured by reference to a fraction of the member’s salary where that salary is subject to a permitted maximum (or earnings cap). In operating that permitted maximum, the scheme rules might have relied upon section 590C of the Income and Corporation Taxes Act 1988 (section 590C), which set a permitted maximum figure each tax year for the purpose of the tax approval rules. As section 590C no longer applies under the new tax rules, the limitations in the scheme rules, as they applied on 5 April 2006 might have been lifted inadvertently as a consequence of section 590C no longer having effect. The regulations apply to the rules of that scheme in such a way as to maintain the effect of s590C on those rules.