Pensions Tax Simplification Newsletter No 25

28 February 2007

Contents

Introduction

Welcome to the twenty fifth edition of the Newsletter.

Please pass this Newsletter on to anyone else in your organisation who you think may find it useful.

Lifetime allowance test under BCE3 on scheme pensions which started before 6 April 2006

There is currently a consultation exercise being undertaken by HMRC about the way that the tax rules on benefit crystallisation event 3 (BCE3) operate. The responses to the consultation, as made up to the closing date of 28 February 2007, are currently being considered. But within the exercise, there have been representations made seeking clarity about how HMRC will interpret the existing provisions for deciding whether an increase to a scheme pension, which started before 6 April 2006, will be within the permitted margin or trigger a BCE 3. The provisions are at paragraph 12 of Schedule 32 Finance Act 2004.

This newsletter item is to provide practitioners with some clarification, in response to those concerns, about what pension increases are to be regarded as being within the permitted margin.

The permitted margin is the notional measurement applied from the original date of entitlement to the scheme pension within which pension increases will not give rise to a BCE3. Normally, the permitted margin is the greater of 5% per year and the increase in the retail price index (RPI). But for scheme pensions which started before 6 April 2006, there is an additional measure as an alternative to the greater of 5% or RPI and it is described as P%. This relates to the increases that may be made each year under the scheme’s own provisions as they stood at 5 April 2006.

P per cent does not need to relate to a year-on-year percentage increase. Rather, the expression of a percentage exists as a common form of comparison with the other forms of increase. We are prepared therefore to accept that increases to a pre A Day scheme pension, whether the increases are made before, on or after 6 April 2006, which may be accepted as being within P per cent include the following if they are permitted within the scheme’s provisions as at 5 April 2006:

  • an increase to reflect an adjustment to the level of pension in recognition of the revaluation of contracted-out rights, i.e. to a guaranteed minimum pension (GMP).
  • an increase awarded by use of the discretion of the scheme administrator/trustees where such an increase is demonstrably in keeping with the power permitted within the scheme provisions.
  • an increase which relates to an element of a pension, for example, a contracted-out element, which does not relate to another element, or where both elements are increased but at different rates.

All the above increases would be subject to the scheme provisions which limited the scheme pension to the pre A Day HMRC benefit limits. But where a pension was paid at the maximum level, or reached such a level following pension increases, it is likely that it could be further increased at the greater of 3% per year or the increase in the RPI, see RPSM11104400. Increases, even where made after 5 April 2006, which do not produce a pension level above the maximum plus 3%/RPI may be accepted as being within P%.

In summary, if it can be established that an increase to a scheme pension which started before 6 April 2006 would have been permitted within the scheme provisions as they stood at 5 April 2006, it may be regarded as being within P%. It would follow that such an increase would fall within the permitted margin, and does not give rise to a BCE3.

The above interpretation may be taken to apply for testing against the lifetime allowance from 6 April 2006. If a scheme administrator has produced a statement to the member showing a percentage of standard lifetime allowance which now transpires not have to have produced an amount crystallised, then the member should be informed that the statement is cancelled. If a lifetime allowance charge has arisen which now requires adjustment, an adjustment may be made under the normal accounting for tax procedure.

Notional Earnings Cap 2007-08

The Registered Pension Schemes (Modification of the Rules of Existing Schemes) Regulations 2006 [SI 2006/No 364] modify the rules of existing pension schemes that automatically became registered pension schemes on 6 April 2006 for a certain period, called the “transitional period”, which ends on the earlier of

• the first date after 5 April 2006 on which rule amendments in relation to such an existing scheme take effect that state that the modification regulations no longer apply to the scheme, or
• the end of the tax year 2010-11 (or such later time as is prescribed by HM Revenue and Customs).

Before 6 April 2006, section 590C of the Income and Corporation Taxes Act 1988 (section 590C) applied the permitted maximum (or “earnings cap”) to pension schemes, such as tax approved retirement benefits schemes and personal pension schemes.

One of the features of the modification regulations is the preservation of the effect of the permitted maximum on existing pension schemes to which the modification regulations apply during the transitional period, despite the repeal of section 590C on 6 April 2006. The regulations continue to apply the permitted maximum during the transitional period as if section 590C had remained in force and the Treasury had made the required orders to set the permitted maximum figure for a particular tax year.

If section 590C had not been repealed on 6 April 2006, a Treasury order would have stated the permitted maximum figure for the 2007-08 tax year. Had that order been made the permitted maximum figure for the 2007-08 tax year would have been £112,800.

Pension Scheme Self Assessment Tax Return

In April, Pension Scheme Services will be issuing the Self Assessment Tax Return (SA970) to pension scheme trustees. Previously the return was issued to all self administered schemes. With effect from 6th April 2007 the SA970 will only be issued to scheme trustees if there has previously been any tax liability or a repayment has been claimed. If you do not receive a return and have a repayment to claim or liability to declare you will from April, be able download the SA970 for the year ending 5 April 2007 from the SA pages.

Scheme Administrators may be issued with a Pensions Notice 1 under Section 250 Finance Act 2004 to complete a Pension Scheme Return (APSS301 or APSS313). These notices are likely to be issued at around the same time as the SA970. The two forms are entirely separate and should not be confused

Withdrawal of Statement of Practice 13/91

On 15 February 2006 in the What’s New section of the homepage of HMRC’s Internet site, we announced the publication of Revenue & Customs Brief 17/07. The Brief clarifies that Statement of Practice 13/91 “Ex gratia payments made on termination of an office or employment due to retirement or death” was withdrawn with effect from 6 April 2006 as originally notified in the Employment Income Manual at EIM 15170.

Errors and Mistakes Guidance

We have published guidance on how payments made in genuine error are treated under the tax rules for registered pension schemes. Currently the Errors and Mistakes Guidance (PDF 78K) is in a standalone format but it will be incorporated into the Registered Pension Schemes Manual in due course.

Contact Us

If you have any questions about anything to do with new tax rules and you can’t find the answer in the Registered Pension Schemes Manual, please contact us by e-mail or telephone our helpline number 0115 974 1600 (9.00 to 17.00 Monday to Friday) or you can write to us at

Pension Schemes Services (PSS)
Yorke House
Castle Meadow Road
Nottingham
NG2 1BG