Several interesting developments in pensions tax legislation announced in the wake of last week's Pre-Budget Report are presently in some danger of being overlooked in favour of today's Government White Paper "Personal Accounts: a new way to save". This is a large document; as even the "Executive Summary" runs to 44 pages, we shall not attempt to summarise it here at the moment. Although derided in advance by some as 'Stakeholder Mk II', the plan for Personal Accounts at least begins to address what was arguably the principal reason why take-up of stakeholder pensions was less than the Government had hoped, viz. the failure to oblige employers to contribute. In future, if the employer does not sponsor a pension scheme he will be obliged to pay 3% of payroll into Personal Accounts for all employees; or more precisely, all employees who do not opt out. A significant proportion may not need much encouragement to do just that.

Meanwhile today HMRC posted advance details of forthcoming new secondary legislation.

1. Transitional protection and transfers

A particularly welcome proposal is to amend the transitional Order (SI 2006/573) so that protected tax-free cash is preserved where an existing insurance contract is “assigned” to the individual member, just as it is on buy-out during wind-up, by treating it as a block transfer. The industry has argued strongly for this parity of treatment. Any transitionally protected entitlement to early pension age will also be preserved in a similar way.

In addition, it is proposed to amend the provisions of the Order relating to transfers consequent on scheme reorganisations in the period between 10 December 2003 (the date of publication of the pension simplification proposals) and A-Day. These amendments will extend the protection of early pension age entitlements, so as to cover deferred members whose rights were not wholly transferred in a single transaction because of the effect of contracting-out legislation, or whose former employer had no involvement with the scheme to which they were transferred.

2. Information Requirements for Deferred Annuity Contracts

Because Deferred Annuity Contracts (DACs) set up on or after 6 April 2006 (A-day) are deemed to be registered schemes, they are required to notify HMRC of their winding-up. This is a significant administrative burden for insurers and HMRC especially as, in most cases, winding-up simply results from the deferred annuity coming into payment. A new regulation will remove this requirement, where the first event the administrator needs tell HMRC about is the winding up of the DAC. Some insurers pay a small sum into DACs before they come into payment to enhance the retirement lump sum. HMRC intend to also cover these DACs in the proposed administrative easement.

3. Bridging Pensions

Finance Act 2006 Sch 23 para 20 introduced new flexibility, permitting a bridging pension to be paid up to any age between 60 and 65, irrespective of whether the member has actually reached state pensionable age at the time the reduction in scheme pension takes effect. The maximum amount which can be paid as a bridging pension was also increased, by raising the maximum reduction from the rate of the basic state pension at the time to 125% of that rate, or where the member has not been contracted-out, 250%.

A power was also inserted so that HMRC could provide by regulations for a different rate of reduction in scheme pension for members with a mix of contracted-in and contracted-out employment in the same scheme. Draft regulations will prescribe how a scheme may calculate a different rate of reduction of the scheme pension where the employment of the member has been partly contracted-out.

4. Modification of rules of existing schemes

The Government also proposes to lay a new Order to deal with the difficulty faced by those occupational schemes whose rules contain a condition that no amendment to the rules may be made unless "approved" by the Inland Revenue (HMRC). As "approval" is now an obsolete process, the trustees of these schemes are effectively prevented from amending the scheme rules. The Order will provide an over-ride to any provision in the rules which makes amendment of the rules subject to HMRC approval.

Draft regulations will appear in the New Year on these matters.

5. Up-rating the Lifetime Allowance and the Annual Allowance

Using the power in Finance Act 2004 HMRC will be making in the New Year a Treasury Order to formally provide for the increases to the Lifetime Allowance and the Annual Allowance that were announced at Budget 2004, for the tax years 2007/08 through 2010/11.

Benefit crystallisation event 3 and the dependants’ scheme pension rules

HMRC has also launched an enquiry into whether the lifetime allowance test at benefit crystallisation event 3 and the dependants' scheme pension rules could be made more flexible, "to smooth the operation of the new pensions tax regime to enable the benefits of pensions simplification to be realised." The Government will make a decision on whether to make legislative changes in Finance Bill 2008 after considering the representations it receives.

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.

The factor of 20 applied to the initial pension paid to the individual includes an element to take into account an amount of dependants’ scheme pensions that may become payable after the member’s death, based on the level of dependants’ pensions commonly paid. A dependant’s scheme pension, when taken, is not subjected to any further test against the lifetime allowance. Clearly, if abnormally high dependants' scheme pensions are paid, the element built into the factor of 20 will be inadequate. For those nearing their lifetime allowance, it would be possible to minimise the member's scheme pension payable, with the intention of paying excessive dependants' pensions, thus avoiding a charge to the lifetime allowance.

To counter this, if the member dies after age 75 when in receipt of a scheme pension, there is a limit on the amount of dependants' scheme pension that may be paid. The limit is based on the member's pension in the 12 months to the member’s death plus a proportion of any lump sum taken by the member in connection with that pension. Schemes have complained that this is another sledgehammer to crack a nut in that, currently, the rules apply to all scheme members when in fact only a small proportion will have a risk of exceeding the lifetime allowance limits.

The consultation will aim to identify any changes that can be made to filter out cases from these tests where there is little or no risk of the lifetime allowance being abused, including the setting of de minimis limits. The questions posed by the condoc might also serve as a model for assessing other sledgehammers at large in the operation of the Finance Act 2004, and achieving a more pragmatic regime as a result. Responses should be submitted by 28 February 2007, by email if possible, to: pensionsconsult@hmrc.gsi.gov.uk

Two relevant SIs have been laid in the last few days:

1. The Registered Pension Schemes (Enhanced Lifetime Allowance) (Amendment) Regulations 2006 (SI 2006/3261).

We reported earlier on a consultation draft of these regs, which apply to some death events where the deceased member had notified reliance on primary protection or enhanced protection. The way Finance Act 2004 worked, if lump sum death benefits were actually paid, they could be subject to the lifetime allowance charges even if the amount of lump sum death benefits paid was no greater than the amount that would have been payable on 5 April 2006. This year's Finance Act amended FA 2004 to ensure that lump sum death benefits paid by a pension scheme were also eligible for transitional relief from lifetime allowance charges in the same way as other authorised pension and lump sum benefits. These amending Regulations insert the administration process for individuals to claim the enhanced lifetime allowance relief taking account of death benefits, into the principal Regulations (SI 2006/131).

2. The Income Tax (Indexation) (No.2) Order 2006 (SI 2006/3241).

This specifies the amounts of personal allowance, married couple's allowance and blind person's allowance for 2006-07.

DWP Simplification Plan

Finally, not to be outdone the DWP this week has published its own Simplification Plan [PDF]. This extends far beyond pensions. In fact private pensions receives rather brief mention, viz. the three proposals included in the Pensions Bill introduced on 28 November 2006 (conversion of guaranteed minimum pensions; abolition of contracting-out for defined contribution pension schemes; and dispute resolution arrangements). Of more long-term interest, perhaps, is the following:

"Work is in progress on a long-term project to consolidate primary legislation dealing with private pensions, which is contained in five Acts of Parliament:
• Pensions Schemes Act 1993
• Pensions Act 1995
• Pensions Act 2004; and parts of
• Welfare Reform and Pensions Act 1999, and
• Child Support, Pensions and Social Security Act 2000;
and any new pensions Acts receiving Royal Assent during the project.

The Department proposes to consolidate pensions legislation as soon as practicable. The Law Commission has appointed a solicitor to undertake this consolidation and work is underway. The project is expected to be completed by the end of 2009."

This exercise could, in theory, deliver further simplification in intelligible drafting alone. However this would surely require a radical departure from established practice, involving a genuine re-write approach. The DWP says it is keen to hear your suggestions on simplification, via email to simplification@dwp.gsi.gov.uk.

Footnote

In March 2005, the Better Regulation Commission - the independent champions of better regulation - recommended that each government department prepare simplification plans. The Government accepted this recommendation and asked the BRC to act as the independent reviewer of the plans. For this first year, each plan has been assessed separately for its credibility, ambition, quantification and deliverability.

Here's what the BRC thinks of the DWP's plan [PDF]:

"The department has made progress in a number of complex areas, notably offering the prospect of less prescriptive personal pensions, more flexible occupation pensions and a reduced reporting requirement related to Housing Benefit Regulations. That said, we would be looking for a considerably more imaginative and aggressive approach to simplification and to burden reduction over the next few years. In particular, we would suggest that insurance contributions, occupational and personal pension disclosures, statutory sick pay recording requirements and maintenance of occupational pension scheme records could all benefit from attention. This will require a more pervasive departmental commitment to the better regulation agenda than has been apparent to the BRC to date."