Pensions Tax Simplification Newsletter 31

6 November 2007

Contents

Introduction

Welcome to the thirty first edition of the Newsletter. This edition contains a summary of the pensions changes that were published at the Pre-Budget Report on 9th October 2007 along with a number of other articles containing information and guidance that we feel customers need to know or would be interested in.

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

Pre Budget Report - 9 October 2007

PBR 2007 contained several announcements on changes to the pensions' tax regime to ensure that the pensions tax rules continue to meet their original intention and that pensions tax relief is only used for saving for a retirement income:

Spreading of Tax Relief on Employer Contributions

A targeted rule will be introduced to ensure that the tax deduction for employers funding pension contributions that are excessively large relative to the previous year's contribution, will be spread over a number of years as intended by legislation. The new rule seeks to ensure that the spreading of contributions cannot be avoided by interposing a new company and financing it to pay the pension contribution. The change will have effect from 10 October 2007.

Further details are in PBR note 13 (PDF 52K) and the published draft legislation (PDF 109K).

Inheriting Tax-Relieved Pension Savings

Following the consultation earlier this year, draft legislation has been published to prevent the diversion of tax-relieved pension savings into inheritance using scheme pensions and lifetime annuities.

This will impose unauthorised payment charges when a member of a pension scheme with rights under a lifetime annuity or dependant's annuity surrenders rights to payments under the annuity.

It also imposes unauthorised payment charges when a member of a pension scheme, who has rights to a scheme pension, a lifetime annuity, a dependant’s scheme pension or a dependant’s annuity, dies and a connected person becomes entitled to an increase in their pension rights under the scheme that is attributable to that death. But this is not to apply where the scheme has more than 19 members and the increases in rights are applied evenly across all members.

IHT charges will be imposed on such an increase in pension rights of a person connected with the deceased under the scheme, but only when the member who dies was aged 75 or over. And finally IHT charges will also be imposed where a member dies aged 75 or over and there is an unauthorised lump sum payment in respect of the deceased's pension scheme arrangement. There is no IHT payable in respect of surrenders.

The proposed legislation will have effect for surrenders made on or after 10 October 2007 and for increases in pension rights attributable to the death of a member when the member dies on or after 6 April 2008.

Further details are in PBR note 15 (PDF 53K) and the published draft legislation (PDF 205K).

Technical Improvements

There will be a package of measures in Finance Bill 2008 that will provide easements to the rules around the following;

  • Lifetime allowance test (benefit crystallisation event 3) BCE3
    • Widening the circumstances in which schemes are exempt from the test.
    • Exempting increases in pensions as long as they don't exceed a normal rate of increase in a pension in a 12 month period.
    • Changing the definition of the rate of RPI slightly so that schemes don't have to wait for official RPI figures to come out.
  • Additional lump sum calculation
    • A change to the calculation of protected lump sum rights where additional amounts are put into the scheme or additional benefit accrues after A Day.
    • Schemes will no longer have to calculate whether relevant benefit accrual has taken place and this will simplify the administration of the protected rights
  • Taxable property provisions
    • A change in the definition of investment-regulated pension schemes to ensure that this does not include large occupational schemes where none of their members can influence the scheme to invest in taxable property.
  • IHT on Overseas Pension Schemes
    • Legislation will be introduced in Finance Bill 2008 to restore inheritance tax (IHT) protection to UK tax-relieved pension savings held in overseas pension schemes to have effect on and after 6 April 2006. These savings will be provided with the IHT protection that is available to funds held in UK registered pension schemes.

Further details are in PBR note 14 (PDF 59K) and the associated Impact Assessment (PDF 105K). Draft legislation (PDF 155K) in respect of BCE3 has also been published. Draft legislation for the other measures within the technical improvements package will be published in due course.

Review of the Operation of the Open Market Option (OMO)

Registered pension schemes may provide pension annuities solely through an open market option.

The 2006 Pre Budget Report (PBR) announced that the Government would work with a range of key stakeholders to improve the operation of the open market option (OMO) whereby an individual can shop around for the best annuity deal to suit their circumstances. The outcome of this review was announced at PBR 2007 and the detailed measures can be found here.

During the review it was suggested that some pension providers may be offering uncompetitive rates for annuities because they believed the tax rules required them to offer pension annuities to their members, even if that was not a service they really wanted to provide or could afford to offer on a competitive basis. Therefore one of the outcomes of the OMO review is this clarification that the tax rules permit a registered pension scheme to be set up with the intention of providing pensions solely through the exercise of an OMO. There is no actual requirement that the pension has to be provided directly by the scheme as long as clear provisions are in place that a pension will be provided through an OMO.

Correction to Newsletter 29 - Alternatively Secured Pensions and Untraceable Members

We apologise for a misprint in the article about how the ASP rules apply to members who are untraceable at their 75th birthday that appeared in Newsletter 29. There was a missing "not" in the second sentence of the 6th paragraph under the heading "Alternatively Secured Pensions" which should therefore read as follows: "Where such members had not previously been drawing an unsecured pension, their funds will not automatically be treated as becoming held in an ASP at this point." It is emphasised that the member's uncrystallised funds in an arrangement will still be tested against the lifetime allowance at age 75 by the operation of paragraph 8(2) of Schedule 28, Finance Act 2004, but rather than then becoming automatically held in an ASP at this point, the funds of an untraceable member will, instead, remain in suspense as explained in Newsletter 29.

Registering schemes

We have been asked whether it is possible to apply to register a scheme before that scheme has been established.

The Pension Schemes Online Service does not offer a facility to specify a registration date other than the date of the application for scheme registration. A scheme must be established on or before the date of the application for registration if the registration is to be legally valid.

There is no requirement that a scheme should have received contributions or allowed members to join before making an application for registration.

Reportable Events

Pensions Simplification has meant wide ranging changes to returning information. There are formal systems in place for you to tell us about reportable events and there are time scales for when this information should be sent to us. You must follow these procedures and tell us about reportable events in the right format at the right time.

Sending us information in a letter around the time that an event occurs (usually well in advance of the reporting date) does not end your responsibility for reporting that event. The current reporting procedures are supported by legislation and it is important to make returns at the correct time using Pension Schemes Online or, where appropriate, the correct forms, if penalties are to be avoided.

More information on reporting requirements and using Pension Schemes Online can be found in Newsletter 30 and in the Registered Pension Schemes Manual.

Tax Return for the Trustees of Registered Pension Schemes - SA970

In Pensions Newsletter 25, published in February 2007, we advised that we did not intend to issue a Self Assessment return to a scheme unless they had previously claimed tax repayments or had a liability to declare. However, if a return was issued, it should be completed and returned, whether or not it falls into this category. This is a statutory requirement. If a return has not been issued, the onus is on the scheme trustees to send one to us if it is appropriate. We have been receiving a large number of unsolicited returns which do not fall into either of these categories and would urge trustees not to submit them if they are not needed.

There are a number of schemes who have not previously been issued with returns but who do claim repayments of tax deducted from the scheme's investment income. We intend to issue all registered schemes that fall into the categories above with Self Assessment returns from April 2008 for the tax year 2007/08. This will include Self Invested Personal Pension Schemes and any other scheme which has claimed a repayment this year. In order to do this, over the coming months we may be writing to some schemes for information about the scheme set up and/or trustee details in order that the returns can be properly served.

Event Report - Question 15 (lump sums over 25%)

Some scheme administrators have been answering question 15 (lump sum over 25%) on the Event Report incorrectly. Under question 15 for the "amount crystallised" you should not include the amount of the lump sum. You should enter the amount crystallised in relation to only the pension. So where the pension is

  • a lifetime annuity the "amount crystallised" will be the annuity purchase price,
  • an unsecured pension the "amount crystallised" will be the amount designated to the unsecured pension fund, and
  • for a scheme pension the "amount crystallised" will be 20 times the pension actually paid to the member, i.e. the residual pension left after any lump sum commutation.

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 phone 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