The 31st edition of the Newsletter summarises the pensions changes in the 2007 PBR (see also earlier Aries article). This article covers the new legislation and other matters in the Newsletter.

1. Spreading of Tax Relief on Employer Contributions

Employers generally get relief against their taxable profits for contributions paid to a registered pension scheme. Relief is given for the chargeable period in which the contributions are paid, but some large contributions are spread over a period of up to 4 years. This spreading applies where the contribution:

• is more than 210% of the contribution paid in the previous chargeable period; and
• exceeds 110% of the contribution paid in that previous period by at least £500,000.

Some employers have been seeking to avoid spreading of contributions by interposing a new company and financing it to pay the pension contribution. New draft legislation [PDF] is designed to close this loophole. The Finance Bill 2008 will insert a new s.199A ('Indirect contributions') into FA 2004, to apply where an employer makes a payment intended to facilitate a large pension contribution relative to the contribution in the previous year.

This clause is intended to ensure that with effect from 10 October 2007, the relief the employer is entitled to for such a payment is subject to the same tax treatment as if it were a contribution under a registered pension scheme made directly by the employer.

2. Inheriting Tax-Relieved Pension Savings

Following a consultation earlier this year (see Aries article), five pages of draft legislation [PDF] amending IHTA 1984 and FA 2004 ss. 172 (assignment), 172A (surrender) and 172B (increase in rights of connected person on death) has been published for inclusion in next year's Finance Bill. This will impose unauthorised payment charges when

1. a member of a pension scheme with rights under a lifetime annuity or dependant's annuity surrenders rights to payments under the annuity; or
2. 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 (as defined in s.993 ITA 2007) becomes entitled to an increase in their pension rights under the scheme that is attributable to that death. There is one exception: where the scheme has at least 20 members [the Newsletter says "fewer than 20", but this is a mistake} 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. 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 PBRN 15 [PDF].

3. Technical Improvements

As we reported last month, the Finance Bill will also provide easements to the rules around the following:

(A) Lifetime allowance test at BCE 3 (where a scheme pension that the scheme is already paying to a member is increased above a set limit)

• widening the circumstances in which schemes are exempt from the test;
• exempting increases in pensions as long as they don't exceed the "threshold annual rate" [defined as 5%] of increase in a pension in a 12 month period; and
• changing the definition of the rate of RPI slightly so that schemes don't have to wait for official RPI figures to come out.

Draft legislation has been published.

(B) 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; and
• schemes will no longer have to calculate whether relevant benefit accrual has taken place, which will simplify the administration of the protected rights.

Although the PBR announcement suggested this would apply only to DB schemes, HMRC has subsequently made clear that it will cover all registered pension schemes. The change is expected to involve further amendments to para 34 of FA 2004 Sch 36. Draft legislation has not yet appeared.

(C) Taxable property provisions

A change in the definition of investment-regulated pension schemes (FA 2006 Sch 21 para 13) to ensure that this does not include large occupational schemes where none of their members can influence the scheme to invest in taxable property. Also yet to be published.

(D) IHT on Overseas Pension Schemes

Finance Bill 2008 is also to include legislation to restore inheritance tax (IHT) protection to UK tax-relieved pension savings held in overseas pension schemes With retrospective effect from 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 of these technical improvements are in PBRN 14 [PDF] and the associated Impact Assessment [PDF].

Other Matters

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

Registered pension schemes may provide pension annuities solely through an open market option, ie without having to provide a pension themselves. This 'clarification' has emerged because during the Review [PDF] 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.

HMRC says 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.

2. Correction to Newsletter 29 - ASPs and Untraceable Members

This is about a misprint 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."

We assumed this was an error at the time, as besides the fact that the whereabouts of a member in USP would normally be known, it is clear (from FA 2004 Sch 28 para 11) that on reaching age 75 a member's USP fund automatically becomes an ASP fund.

Newsletter 31 emphasises that the member's uncrystallised funds in an arrangement will still be tested against the lifetime allowance at age 75 by the operation of para 8(2) of Sch 28, but rather than then becoming automatically held in an ASP at this point, the funds of an untraceable member will, instead, "remain in suspense". HMRC was told at a meeting of their Customer Forum last month (see forthcoming Aries report) that this phrase from Newsletter 29 means different things to different providers, so guidance was requested - and also on what HMRC will accept as "all reasonable steps" to trace the member.

3. Registering schemes

The Pension Schemes Online Service cannot accept an application to register a scheme before that scheme has been established. However, there is no requirement that a scheme should have received contributions or allowed members to join before making an application for registration.

4. Reportable Events

Under the new regime, sending HMRC information in a letter around the time that a reportable event occurs (which would usually be well in advance of the formal reporting date) does not absolve the scheme administrator from notifying HMRC about reportable events in the prescribed format at the right time. There is a formal procedure to be followed.

All reportable events occurring during a twelve-month period must be included in an annual Event Report, submitted online as prescribed by SI 2006/570. Only if there is a subsequent amendment is a paper form (APSS300) [PDF] permitted. More information about this can be found in the Registered Pension Schemes Manual at page RPSM 123.01.020 and in the previous PTS Newsletter.

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

A reminder that under question 15 (lump sum over 25%) on the Event Report, the "amount crystallised" should not include the amount of the lump sum: 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.

6. Tax Return for the Trustees of Registered Pension Schemes - SA970