Pension Tax Simplification – Additional Regulations

As we approach the start of the simplified regime in April 2006, the continued close collaboration with the pensions industry has helped to identify a number of additional regulations and orders needed to give full effect to the new regime. These fall into three broad categories:

• Transitional Protection
• Anti – Avoidance and compliance measures
• Other measures

Some of these regulations are published in draft with this note. We aim to publish the remainder in draft over the next couple of months.
In addition, we will be making some minor changes to some of the regulations and orders that have already been published in draft. For example, the published draft of the Relief at Source regulations include provisions to deal with the recovery of relief in circumstances where it should not have been allowed, and the provision of information and records. We now propose including a regulation to provide for a penalty where there is an incorrect claim to a repayment by a pension scheme or HMRC has been given incorrect information. Other, more minor, changes will also be made to drafts previously published and we aim to publish these in the next couple of months.

1. Transitional Protection

We propose transitional or consequential regulations or orders to deal with the following situations:

A. Protection of rights to more than 25% lump sum and early pension age where the scheme is wound up

The rights to a lump sum of more than 25% and a right to take early pension are specific to the scheme to which the member belonged on 5th April 2006. Generally if the member transfers his rights he will lose the protection. But if the scheme winds up the member may have his rights transferred to an individual insurance contract in the name of the individual. This transfer is not at the member’s request but would lose him his protection. The proposed transitional order will protect rights where the scheme winds up.

B. Protection of rights to more than 25% lump sum and early pension age where the scheme is restructured in the period between 10th December 2003 and 5th April 2006

The rights to a lump sum of more than 25% and a right to take early pension are specific to the scheme to which the member belonged on 5th April 2006. Generally if the member transfers his rights he will lose the protection, but if the scheme makes a block transfer of all of the rights of the member and at least one other member then the protection is retained in the receiving scheme. This is to allow the protection to survive the transfer of members as part of a corporate restructuring. To prevent abuse the right being protected must have existed under the scheme on 10th December 2003 (when the change to move the early retirement age from 50 to 55 was announced) and be available to the member on 5th April 2006. However, it has been pointed out to us that a corporate restructuring in the period 10th December 2003 to 5th April 2006 could lose a member of the restructured scheme rights which had been his on 10th December 2003. The proposed transitional order will extend the protection to cover this situation.

C. Block transfers: Permitted Membership period

As announced in our Technical Note of 16 February 2005 (item 4C), and further to the provisions of the first Finance Act 2005, a proposed regulation will define the period during which the member may have been a member of the receiving scheme as the twelve months preceding the block transfer.

D. Protection Of Large Lump Sums Under Enhanced Protection

It has been brought to our attention that the provision for protecting large lump sum rights does not work where either these rights are not all held in the same scheme or the member already has rights in payment that exceed the lifetime allowance (£1.5m). The proposed transitional order will remedy this situation.

E. Meaning of “Maximum Permitted Pension” for Pension Schemes

In determining how much of pre A-day pension rights can be protected it is necessary to first check these rights against the maximum that could have been paid under the existing regime at 5th April 2006 – the “Maximum Permitted Pension”. This ensures that the protection given only covers rights legitimately accrued under the old regimes. This test is known as the limits test. We have recently been made aware that the way certain schemes are constituted means that the limits test will apply in such a way that it will exclude lump sum rights. The proposed consequential order will ensure such lump sum rights are included in the amounts protected.

F. Lump sums held over until after A-Day

There may be occasions where a member will become entitled to a lump sum payment before 6th April 2006 but, for some reason, this is not paid until on after 6th April 2006. These lump sums will be subject to the new rules and may attract a different tax treatment than that expected under the old system. To avoid the confusion this will cause to schemes and members the proposed transitional order will allow the pre 6th April 2006 rules to apply to lump sum payments made after 5th April 2006 where the member became entitled to the payment of the lump sum before 6th April 2006.

G. Annuity Contracts

Pension schemes and annuity contracts that are “approved” under the current tax legislation will automatically become “registered schemes” subject to the new regime (unless they opt out before A-Day). However, certain contracts were unintentionally excluded from the transitional provision that carries the existing structures into the new regime. These are contracts approved under pre-1988 legislation (the forerunners of personal pensions) that provide only for the payment of lump sums. We propose a transitional order to bring these types of contract within the new regime.

H. Transfer of crystallised rights

Enhanced protection, where pre-A day pension rights are not subject to the lifetime allowance charge if certain conditions about contributions and accrual are met, may be lost if rights are transferred in certain circumstances. We propose a transitional order preventing a possible double counting where a pension in payment from a defined benefit or cash balance arrangement is transferred when a pension scheme winds up so that the pension is then paid from a money purchase arrangement.

I. Enhanced Protection and surrender of excess rights

One of the conditions attaching to enhanced protection is that the rights at A-day are not in excess of those that would be allowable under the current pension regime. If the rights are excessive then the excess rights need to be surrendered before the member can claim enhanced protection. DWP will be making regulations to allow surrenders in these cases. The proposed transitional order will set out how surrendered rights are to be valued.

2. Anti-Avoidance and compliance measures

A. Co-ownership of living accommodation

Under the new regime, where a registered pension scheme invests in residential property, any benefits, such as use of the property by a member or a member of the member’s family or household are subject to a tax charge based on the employment income benefit in kind rules.
We propose issuing regulations setting out how to calculate the benefit in kind charge where there is co-ownership of a property between the pension fund and a member or member of the member’s family or household.

B. Lump sum death benefit/pre commencement pensions

Pre A-day rights that are already in payment are deemed to use up lifetime allowance at the first benefit crystallisation event after A-day. We propose issuing regulations, which provide for this rule to apply in the case where a member with a pre-A day pension in payment dies after A day with uncrystallised rights.

3. Other Measures

A. Authorised Surplus Payments

DWP will be issuing regulations on payments of surpluses to employers. We propose to issue regulations, reflecting the DWP rules, to define what authorised payments of surplus funds a pension scheme can make to a sponsoring employer. Authorised surplus payments are to be subject to a flat rate tax charge of 35%.

B. Transfers from registered pension schemes to PPF

The Board of the Pension Protection Fund (PPF) has powers (under the Pensions Act 2004) to take over the assets and liabilities of certain occupational schemes that have become under-funded as a result of the insolvency of the sponsoring employer. The PPF can then pay compensation in lieu of the pension benefits due from the scheme. Transfers to the PPF are not “authorised payments” under the new tax rules, and so are potentially taxable. We propose to issue regulations to ensure that such transfers are treated as authorised payments for the purposes of the new regime.