Simplyfying The Taxation Of Pensions

Draft Regulations Summary Of Responses To Consultation

Background

1. The simplified tax regime for pensions comes into effect on 6 April 2006. From that date there will be a single set of tax rules for all registered pension schemes. The Finance Act 2004 contains the Primary Legislation to give effect to the new regime.

2. On 9 August 2004 draft Regulations, provided for under powers contained in the Finance Act 2004, were published for consultation. The 18 regulations we consulted on are:

3. The consultation period ended on 5 November 2004. In light of the comments received a further draft of the regulations has now been published on the Inland Revenue website. These can be viewed on the Pensions Simplification website.

4. The Regulations will be laid before Parliament later this year to give the industry time to prepare for the new simplified regime.

Outcome Of The Consultation

5. We received 29 formal responses to the draft regulations. All the responses that were received came from the Pensions Industry and Financial Service Providers. The 29 respondents made a total of 569 comments spread across the 18 draft regulations.

6. Following the consultation, the Inland Revenue held two post-consultation workshops with industry representatives to consider the consultation responses and work with the industry to consider what amendments were necessary to the draft regulations.

7. The feedback from these sessions has been extremely positive, with industry representatives welcoming the opportunity to address their comments in more depth. This has been of considerable benefit to the consultation process, and we are grateful to the pensions industry respondents for their involvement on these occasions.

8. Pension tax simplification continues to elicit positive comments:

We welcome the objective behind the regulations, which is to give pension schemes time to amend their scheme rules in order to allow for the changing tax regime – NAPF

Plain English has been used in the draft regulations and generally your requirements seem clearly stated. OPRA supports and encourages the use of plain English where its use is appropriate – OPRA

9. Publication of the draft regulations provided the pensions industry with an opportunity to see the operational requirements of the new pension regime. As a result the consultation attracted a large number of comments on simplification issues outside of the regulations, which are not included in this document.

10. Substantive comments on the regulations are summarised below, together with the Inland Revenue’s response in italics. Time and space prohibit detailed reference to each individual comment here, especially the numerous drafting points, but they have all been carefully considered and addressed where appropriate in the further draft regulations.

11. Copies of every non-confidential response received have been placed in the House of Commons Library and are available for viewing by members of the public.

Responses To The Draft Regulations

The Pensions Schemes (Categories of Country and Requirements for Recognised Overseas Schemes) Regulations

12. There were 38 comments made regarding these regulations. Common responses included requests for further clarity regarding the distinction between “country of establishment” and the country in which tax relief is given, and also in respect of those who are able to claim Migrant Member Relief. Also of prominence were calls for the Inland Revenue to publish a list of Category 2 Countries on their website for easy reference. Additionally, many respondents were keen to see further guidance for scheme administrators on the identification of schemes recognised by relevant tax authorities overseas.

13. At the post-consultation workshop, the Inland Revenue explained that under condition A relief must be available against contributions or benefits in the country where the scheme is tax recognised. But that need not necessarily be the same country in which the migrant member gets relief on his/her contributions under Schedule 33. Schemes must meet condition A, along with either conditions B or C, in order to be recognised for tax purposes under the legislation of a country or territory.

14. Following the consultation, the draft regulations now clarify when condition A in regulation 1 is met.

15. In response to other representations, we have made changes that clarify what is meant by “minimum pensions age” in regulation 3 and how the conditions for the overseas scheme to be regulated as a pension scheme and recognised for tax purposes in its country of establishment are met. Furthermore, we have removed the requirement that an overseas pension scheme shall not be a state social security scheme.

The Pension Schemes (Prescribed Information Requirements for Qualifying Schemes) Regulations

16. This regulation received 23 comments. As well as suggesting the refinement of several definitions, most representations related to the reporting requirements. Some respondents wondered whether UK tax years should be applied to non-UK schemes, and others sought further clarity regarding the meaning of “evidence” and “relevant member”. Several respondents were also keen to see a public register of qualifying recognised overseas schemes.

17. Following consultation, the regulations have been re-drafted to give clearer definitions of “evidence” and “relevant member” for the purposes of regulation 4. To deal with the issue of differing tax years in different countries the regulations have been re-drafted to refer specifically to the year ending 5th April so as to remove any possible confusion.

The Pension Schemes (Application of Charges to UK Tax to Non-UK Schemes) Regulations

18. Only four comments were received in respect of this regulation, which were general in nature.

19. No substantive changes have been made to this regulation which has now been merged with the “The Pensions Schemes (Modification of the Finance Act 2004 in respect of Relevant Non-UK Schemes)” Regulations” regulations to create “The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2005”.

The Pensions Schemes (Modification of the Finance Act 2004 in respect of Relevant Non-UK Schemes) Regulations

20. This regulation attracted 26 responses, an overwhelming majority of which were concerned with drafting points. Some respondents queried why regulations such as 7 and 9 were necessary, and others requested that we further clarify references and definitions such as “court” in regulations.

21. Following consultation, the regulations now provide a clearer definition of “non-EEA [European Economic Area] annuity provider”. While we remain happy with the definition of “court” for this purpose, we have relaxed the meaning of “retail price index”. In response to several representations, we have extended the definition of “recognised medical practitioner” to include a UK-based practitioner and provided a clearer definition of the circumstances in which Inland Revenue discretion may be exercised. Regulations 7 and 9 have been removed as suggested.

22. This regulation has been merged with “The Pension Schemes (Application of Charges to UK Tax to Non-UK Schemes) Regulations” to create the “The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2005) Regulations 2005”.

The Registered Pension Schemes (Relief at Source) Regulations

23. This regulation received 51 comments. Most of these were concerned with the information that the Revenue requires that members provide to schemes to obtain tax relief on contributions and who should be allowed to provide this material in addition to the individual pension scheme members. In particular, respondents focused on the requirement of members to provide National Insurance numbers and the supply of information for or on behalf of minors and incapacitated persons. Several respondents raised the issue of auto-enrolment and whether the Relief at Source Regulations might prove a barrier to this.

24. In light of the consultation responses, the regulations have been re-drafted to clarify that where a person is a minor, has a disability or is incapacitated declarations and information required may be given on their behalf by persons specified in the regulations. We are working with the Department for Work and Pensions on the issue of who is required to supply a National Insurance Number. This will be clarified in the final regulations, or if more appropriate in accompanying guidance. Auto enrolment is an issue for wider Government policy on pensions. The Relief at Source Regulations are concerned with the efficient operation of tax relief and will not pose a barrier to wider Government policy on pensions.

The Pension Schemes (Prescribed Interest Rates for Authorised Employer Loans) Regulations

25. This regulation received 17 comments. While many pointed out typographical errors, some related to the calculation of interest rates, which was considered too complicated. Clarity as to the definition of reference dates was also requested here.

26. After careful consideration, the Revenue stands by its view that the formula set out in the draft regulations is an appropriate way of calculating interest rates and no substantive changes have been made to these regulations.

The Registered Pension Schemes (Relevant Annuities) Regulations

27. 34 comments were made on these regulations. While a few general comments were made, most of these called for the calculation of relevant annuity rates in accordance with tables prepared by the Government Actuary’s Department (GAD) rather than by reference to the Financial Services Authority’s (FSA) comparative annuity tables.

28. Following consultation, the regulations have been re-drafted to provide for the calculation of relevant annuities by reference to tables prepared by the Government Actuary’s Department.

The Registered Pension Schemes (Defined Benefits Arrangements – Uprating of Opening Value) Regulations

29. 9 organisations commented on these regulations. The major concern was how the regulations interacted with "the appropriate percentage" in section 235(3)(c) Finance Act 2004, "the relevant indexation percentage" in paragraph 15(5)(b) Schedule 36 Finance Act 2004 and 'The Occupational Pension Schemes (Preservation of Benefit) Regulations 1991'.

30. Following consultation with the Department for Work and Pensions these regulations will be re-drafted. The changes will ensure that "the appropriate percentage" only applies to the legislation set out in the regulations and that "the relevant indexation percentage" and revaluations arising from the preservation regulations are covered.

31. The consultation highlighted several issues of interpretation and we will be clarifying these in guidance. These regulations will be renamed “The Registered Pension Schemes (Defined Benefits Arrangements and Money Purchase Arrangements — Uprating) Regulations 2005”.

The Pension Schemes (Enhanced Lifetime Allowance) Regulations

32. This regulation received 52 comments. Many of these related to the process by which certificates will be issued, in particular the turnaround times for those needed close to A-Day. Several respondents suggested that the Inland Revenue might feasibly need to issue amended certificates on more than one occasion. Notification requirements provoked further comments, and respondents asked us what would happen in the event of the member’s death prior to receipt of the certificate. Issues surrounding the keeping of records were also raised here.


33. Having listened to the consultation responses we will issue guidance relating to the turnaround times of certificates. We will also re-draft the regulations to amend regulation 6(6) so that an individual may rely upon Section 220 from the date on which they legally acquire the right to the pension credit rather than the date on which the Revenue issues the certificate. Further amendments to these draft regulations will include changes to regulations 7(6) and (15) which permit the Inland Revenue to issue a new certificate showing the aggregated non-residence factor in substitution for the previous certificate when another claim is made under section 221. Aggregation will be covered in guidance.

The Registered Pension Schemes (Minimum Contributions) Regulations

34. Only 3 comments were received here, all of which concerned drafting issues in the interests of consistency and to avoid ambiguity.

35. The draft regulations have been amended to change the reference to ‘the administrator or trustees’ to the ‘scheme administrator’.

The Pension Schemes (Prescribed Schemes and Occupations) Regulations

36. 10 representations were made in respect of these regulations, each of which related to a different but general issue. Two respondents, for example, asked us to clarify the position of FSAVCs here, while another suggested changes to the way in which we refer to individual schemes such as the British Transport Police Superannuation Fund.

37. We have considered these regulations in light of the representations received, and have made no substantial changes to these regulations. Drafting errors, however, have been altered where appropriate.

The Pension Schemes (Modification of Rules of Existing Schemes) Regulations

38. This regulation received 46 comments. Most of these related to the powers of trustees and whether or not employers would be able to veto unauthorised payments. A spread of transitional protection issues was brought to our attention, and suggestions for further provisions were also made. These included the extension of the transitional period to 5th April 2009 and the creation of further DWP legislation to cover situations where trustees have no powers to amend the scheme rules.

39. We are carefully considering the consultation responses and if necessary will publish revised draft regulations.

The Pension Schemes (Discharge of Liabilities under Sections 267 and 268 of the Finance Act 2004) Regulations

40. This regulation received a single comment, which suggested a time limit in which the Revenue must decide whether or not to grant discharge.

41. Having given this representation careful consideration, we do not consider it necessary to make this change.

The Employer-Financed Retirement Benefits Schemes (Provision of Information) Regulations

42. Only 5 comments were received in respect of this regulation, which were general in nature. These included a query about the dispatch of forms to the Revenue, and an enquiry about the reporting requirements where cash benefits are provided.

43. Following the consultation, we have made a small drafting change to these regulations.

44. This issue of reporting requirements for non – cash benefits was considered when the Regulations were initially drafted and we are satisfied that the reference to relevant benefits includes both cash and non-cash benefits.

The Pension Schemes (Accounting and Assessment) Regulations

45. This regulation prompted 8 comments, most of which were concerned with drafting errors.

46. Having noted the concerns that were raised during consultation, the regulations have been re-drafted to clearly state that interest on overpaid tax relief will arise from the later of the due date and the date of payment. We have also clarified that the interest charged on the overpaid amount will reflect any changes to the prescribed rate of interest.

The Registered Pension Schemes and Employer-Financed Retirement Benefits Schemes (Information) (Prescribed Descriptions of Persons) Regulations

47. 10 comments were received in respect of these regulations, most of which related to drafting errors and inclarities. Alternatives were suggested, and our attention was brought to incidences of inaccurate referencing.

48. Following the consultation, the regulations have been re-drafted to correct references as appropriate. For consistency, the phrase ‘at the time the scheme comes into operation’ has been amended to reflect the phrase used in regulation 5(4) of the Employer-Financed Retirement Benefits Schemes (Provision of Information) Regulations. Here, the prescribed time is not later than 7th July following the end of the year of assessment in which the relevant benefit was provided.

The Registered Pension Schemes (Audited Accounts) (Specified Persons) Regulations

49. This regulation received only 6 comments, in which minor drafting errors were highlighted. It was also suggested that the regulations were over prescriptive.

50. Having noted these responses the regulations have been re-drafted to clarify the term ‘administrator’ to avoid any potential ambiguity.

The Pension Schemes (Provision of Information) Regulations

51. The Provision of Information regulations elicited the most comments throughout the consultation period. 226 comments were made, which took in a broad spread of issues. Many of the respondents considered that the regulations were too prescriptive and that the reporting requirements were not conducive to a ‘light touch’ compliance regime. In some cases, respondents were unclear as to why the regulations stipulated the provision of information such as that relating to changes in scheme membership.

52. Respondents suggested that further guidance and/or clarity might be provided on a number of issues, of which the death benefit process and appointment of legal personal representatives were examples cited by a number of respondents. Respondents said that clarity and further detail regarding the reporting of authorised payments would be welcomed.

53. A significant proportion of the representations in respect of these regulations related to regulations 3 and 10. These comments were further discussed at a post consultation workshop on 7th December

54. Following rigorous analysis of the consultation responses, a number of changes have been made to the re-drafted regulations. As suggested, much of the detail relating to reportable events has been clarified, in particular that which relates to the death benefit process, changes in membership and the winding up of schemes.

55. We have also made efforts to render the reporting requirements less burdensome. To give one example, information such as date of birth and national insurance numbers as required in all cases by draft regulations 9(2) (b) and (c) now need only be provided if known.

56. A number of respondents feared that the reporting obligations set out in the draft regulations would result in a tax charge on very few members and as such placed unnecessary obligations on scheme administrators. We have listened to these concerns and the re-drafted regulations remove a sizeable portion of regulation 10 in order to relax this burden. Schemes will now have some flexibility in satisfying themselves about whether or not a lifetime allowance charge is payable, and scheme administrators will now be obliged only to confirm to the Revenue that they have accounted for tax or will do so.

Conclusion

57. The consultation exercise on these draft regulations attracted a significant number of responses. In deciding upon action in the light of the representations made, the Inland Revenue has analysed and considered every response received and taken the opportunity to further discuss issues about which the pensions industry told us they were most concerned. A further draft of the regulations has now been published and can be viewed on the Pensions Simplification website.

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