Tech talk
Pensions Simplification - Finance Bill 2006 - TT11/06
The Government has announced some additional changes to pension
simplification that will be introduced in this year's Finance
Bill. Please refer to our Tech Talk numbered 34/05 for previously
announced changes included in the Pre Budget Report. This
Tech Talk covers the latest additional changes.
Transitional Protection and Lump Sum Death Benefits
There are two proposals to amend the current legislation.
The first proposal concerns the issue of an individual registering
for enhanced protection whose pre 'A-day' life cover is being
maintained by contributions being paid to the pension scheme.
Under existing legislation, the continuation of payment of
these contributions to the pension scheme post 'A-day' would
invalidate enhanced protection. The proposal will allow contributions
to continue to the pension scheme provided that the lump sum
death benefit is maintained at the level that would have been
paid at 5th April 2006.
The second proposal will allow 'stand-alone' lump sum death
benefits to be maintained without the loss of enhanced protection.
Again the amount of the lump sum death benefit should be that
payable had death occurred on 5th April 2006.
Bridging Pensions
Some occupational schemes provide a temporary pension payable
from normal retirement date until state pension age, when
that pension will cease. The amount of this temporary pension
is normally equivalent to the State Retirement Pension. Whilst
the Finance Act 2004 allows for the payment of a bridging
pension, the legislation is too restrictive and difficult
for schemes to administer as it provides for the reduction
in payment to be based on the actual state pension in payment.
It is possible for a member to defer payment of the state
pension which would result in no reduction or to be entitled
to and receive a pension less than the full amount which would
result in a lower than normal reduction. Therefore, the proposal
will allow for a reduction in payment to be made irrespective
of whether the member takes the state pension at state retirement
age, or receives a state pension lower than the maximum.
There will be a limit to the maximum amount of reduction.
For contracted out schemes this will be the maximum basic
state pension and for contracted in schemes this will be twice
the basic state pension.
Refund of Excess
Currently where a member pays a contribution in a tax year
of more than the maximum amount that he can receive tax relief
on, he can claim a refund of the excess contribution during
the period ending on the 6th anniversary of the end of the
tax year in which the contribution was paid. For example,
if a member pays a contribution greater than the tax relievable
amount in the 2006/07 tax year, the member will be able to
claim a refund of the non tax relievable contribution up to
the 5th April 2013.
The refund is calculated by the formula RPC - MAR - ALS where
RPC is the amount of the relievable pension contribution paid
by (or on behalf of) the member in the tax year; MAR is the
maximum amount of relief available, and ALS is the total value
of any refund of excess contribution lump sum(s) previously
paid in respect of that tax year to the member.
The way that the legislation is currently worded, it is possible
that where contributions are paid under the 'relief at source'
basis, a member would receive a refund greater than the excess
amount. The 'relief at source' basis is where the member pays
the contribution net of basic rate tax. An example may help
highlight the problem. If a member earning £100,000
has paid a 'relief at source' contribution of £156,000
(equivalent to £200,000 gross) and claims a refund of
excess contribution, the formula would allow a refund of £100,000
(£200,000 - £100,000 - £0), This is greater
than the excess contribution paid by the member of £78,000
paid under 'relief at source'.
The proposal will change the refund basis for excess contributions
paid by 'relief at source', to remove from the calculation
the tax relief given in respect of the excess contribution.
Migrant Member Relief
Migrant member relief 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 migrant
member relief is that the individual must have been a non-UK
resident when they joined the overseas scheme.
The Revenue is aware that the condition mentioned above would
cause a problem if an employer was taken over whilst an individual
was claiming migrant member relief. If the individual is forced
to join the new employer's scheme by 'block transfer' the
individual would be ineligible for migrant member relief.
Likewise if the employer closes down the existing pension
scheme and forces the employee to join a new pension scheme
the employee would be ineligible for migrant member relief.
The Revenue propose to include a regulation making power within
the Finance Bill 2006 to allow individuals in these situations
to retain migrant member relief.
Maximum Permitted Pension
The Revenue announced on the 8th August 2005 that a consequential
Order would be issued to ensure that lump sum rights are included
in the amounts that are transitionally protected from the
lifetime allowance charge. This will now be included in the
Finance Bill 2006.
The rules for calculating the maximum permitted pension are
based on the assumption that the tax free cash lump sum is
available by commuting part of the pension. However, not all
schemes allow tax free cash by commutation but instead provide
tax free cash as a separate benefit. For these schemes that
provide tax free cash as a separate benefit this benefit is
not included in the maximum permitted pension formula. A change
will be introduced in the Finance Bill 2006 to include tax
free cash where this is provided as a separate benefit.
Comment
Generally these sensible and welcome changes, none more so
than the first one which will mean that individuals will no
longer have to make a choice between giving up enhanced protection
or losing their life assurance cover.
Presumably it was the Revenue's own officials who spotted
the problem with the maximum permitted pension provisions.
Fraser Grant - March 2006