Buried deep in the documents published after the Pre Budget Report on 9/10/2007 were changes to be included in the Finance Act 2008 (that will amend FA 2004) to resolve issues that have been raised concerning Pensions Tax Simplification. The following proposals for change have been made:

1. Benefit Crystallisation Event 3

This is a subject that was raised at the time of the 2006 Pre Budget Report following which a consultation exercise took place. We reported on this matter at the time and announced the publication of a consultation document in January 2007.

Benefit crystallisation event 3 is intended to prevent people deliberately taking a smaller scheme pension in the first year of their pension entitlement in order to avoid the lifetime allowance charge. BCE 3 applies where a scheme pension that the scheme is already paying to a member is increased above a set limit. As a result of the consultation exercise, the Government have come up with firm proposals about how to tackle the issue and have also published draft legislation [PDF].

The proposed new rules will mean that a test will only need to be applied in a case where the increase is in excess of a "normal" rate of increase (in the draft legislation this is where the rate of increase exceeds 5%) with RPI allowable where greater than that rate. The appropriate RPI level will be that for the month that is 2 months before the increase in pensions. This is slightly different (and in addition) to the permitted margin as it sets the level (referred to as the "threshold annual rate") that is not a BCE 3 under s.216 of FA 2004.

A further concession will mean that an exemption will apply where at least 20 members have been paid the same increase at the same time (replacing the requirement that all pensioner members must be paid the same increase).

Taken together, these changes should significantly reduce the number of cases where a BCE 3 will occur and, therefore, where a Lifetime Allowance Test is triggered.

2. Tax Free Lump Sums with Protection

This change applies to Defined Benefit (DB) schemes where scheme members have protected rights to a tax free lump sum in excess of the standard 25% permitted under Pension Simplification. The revision would remove the condition of further benefit accrual when calculating an entitlement to any additional tax free lump sum built up after 5 April 2006. The current basis involves a relatively complex calculation that takes into account the rate of increase in the Standard Lifetime Allowance over the post-6 April accrual period when determining the authorised tax-free lump sum allowed.

3. Scheme Investments

Few details of this proposed change have been published at this stage. The problem stems from the fact that the current rules may, in certain circumstances, catch large occupational schemes even though none of their members can influence the scheme to invest in taxable property. The solution is to repeal the part that is inadvertently catching large schemes with investments in property assets.

The above changes have been the subject of an Impact Assessment [PDF] produced by HMRC. In addition to the changes above, the Impact Assessment also covers one further issue on which it has been decided no corrective action will be taken. That issue relates to the Lifetime Allowance Test for a Dependant's Scheme Pension where the member dies after age 75.

Draft legislation has also been published on Inheritance Of Tax-Relieved Pension Savings [PDF] (originally reported on in March) and Spreading of relief on indirect contributions [PDF]. These are both anti-avoidance measures.