Finance Bill 2006 Measures
On 5 December 2005 the Government announced details of further pension tax simplification measures to be included in Finance Bill 2006. In response to representations and comments received from the pensions industry, the Government has agreed to a small package of additional measures that will come into effect from 6 April 2006. The details are set out below.
Transitional protection and lump sum death benefits
Some individuals have taken out regular premium term assurance life policies as part of their pension arrangements. These policies pay lump sum death benefits where the individual dies during the term. Continuing to make contributions to the pension scheme in order to fund the insurance premiums after the new regime begins would cause the loss of enhanced protection. In such cases, the individual would be faced with the loss of either enhanced protection or continuing insurance cover. Similarly, some individuals belong to schemes that include stand-alone entitlements to death benefits, which may be paid as a lump sum in the event of the individual’s death before retiring or reaching a certain age. The rights to these payments normally have no value, and are not therefore included in the total that may be protected from the lifetime allowance tax charge. This means that the lump sum death benefits are potentially taxable in the event of the individual dying after the start of the new tax regime.
The Government proposes to include legislation in Finance Bill 2006 to extend the transitional protection rules so as to
- allow insurance premiums to continue to be paid into policies paying lump sum death benefits where the benefits payable under such policies remain those that would be payable under the terms of the policy as they stand at 5 April 2006; and
- protect the amount of stand-alone lump sum death benefits that would have been payable were the individual to have died immediately before the start of the new regime, in the event of death benefits being subsequently payable because of the death of the individual within the term of the policy.
Bridging Pensions
Some schemes provide additional pension to members until they start to receive their state pension, sometimes referred to as bridging pensions. This is permitted under the current tax rules. The intention is that the pensioner’s income remains broadly the same throughout retirement. Finance Act 2004 continues to allow this facility for schemes to pay a higher pension until the member starts to receive state retirement pension. But HMRC has recently received a number of representations that the Finance Act 2004 provision is too restrictive and, in particular, would present significant administrative difficulties for schemes and their members in establishing the extent to which the scheme pension may be reduced, because the rule requires that this is based on how much state pension the member actually receives. Legislation will, therefore, be introduced in Finance Bill 2006 to amend this rule, so that schemes may reduce the rate of scheme pension payable when a member reaches state pension age, regardless of whether they have an actual entitlement to state pension. For schemes that contract-out of the state scheme, a reduction in the rate of scheme pension will be permitted of up to the maximum annual amount of basic state pension. For contracted-in schemes, a higher reduction of the rate of scheme pension payable will be permitted of up to two times the maximum basic state pension.
Refund of excess contributions lump sum
The refund of excess contributions’ lump sum rules allow a member to reclaim an amount of contributions made to their pension scheme in a year on which they are not entitled to tax relief. There is a limit on the lump sum that may be claimed, which is the member’s relievable pension contributions less the maximum amount of relief due. However, where a member receives relief on their contributions through relief at source the limit would permit a greater amount to be repaid to the member than the actual excess contributions. Legislation will, therefore, be introduced to ensure that where a member is given relief on their contributions through relief at source then the limit on the refund of excess contributions’ lump sum will exclude the amount given through relief at source on the excess contributions made by the member.
Migrant member relief
Migrant member relief (MMR) allows UK tax relief for migrant workers who come to the UK as existing members of overseas pension schemes and continue to make contributions to their overseas scheme whilst in the UK. One of the conditions for accessing MMR is that the individual must have been non-UK resident when they joined the overseas pension scheme.
It has recently been brought to HMRC’s attention
that individuals may be unfairly prevented from
getting MMR if, after they come to the UK, their
employer company is taken over and they are forced,
in a ‘block transfer’ of all members’
rights, to join the scheme of the new company. In
such circumstances the individual would not have
been non-UK resident when they joined the new scheme.
Similarly if their employer closes down their existing
scheme and forces them to join a new scheme instead
they will no longer meet the non-residence condition.
There will therefore be a regulation-making power
in the Finance Bill 2006 to enable HMRC to regulate
to allow individuals in these circumstances to continue
to get MMR on contributions to the new scheme.
Maximum Permitted Pension
HMRC announced on 8 August 2005 that a consequential Order would ensure that lump sum rights are included in the amounts that are transitionally protected from the Lifetime Allowance tax charge. Because of legal doubts about the power to make this particular Order, the measure will instead be included in Finance Bill 2006. The rules for calculating the value of a person’s protected pension rights are based in part on the “maximum permitted pension” to which that person is entitled immediately before the start of the new tax regime.
However, the statutory formula is based on the assumption that part of the pension can be commuted to provide a tax-free lump sum. Certain schemes do not allow exchange of pension for lump sum, and the rules as they stand have the effect of depressing the total value of the rights that members of these schemes can protect. The Finance Bill measure will amend the computation of maximum permitted pension for such schemes so that the value of the separate lump sum is reflected in the formula.
