With today's Pre-Budget Report the Government has published its response to last spring's consultation on simplification of the pensions tax regime. It's another consultation paper ("Simplifying the taxation of pensions: the Government's proposals"), with the final decisions to be taken in the 2004 Budget; the whole idea may yet be dropped altogether.

Responding to fierce lobbying for a much higher "lifetime allowance" (LTA), the Government still thinks £1.4m is right, as it has seen "no credible evidence" to the contrary. However, the National Audit Office will be asked to check into it (using a factor of 20:1 to convert a DB pension into a capital value, a figure apparently suggested by the Association of Consulting Actuaries) and report back before next year's Budget. The NAO will also consider the reasonableness of Government estimates that

1. only about 5,000 people (pre-87 and 87-89 members) will have pension funds worth more than £1.4m by 5 April 2005, and
2. over the next ten years, only about 1,000 more people per year may come up against the new limit.

The NAO's judgment will apparently influence - if not determine - whether the simplified regime is introduced at all (in next year's Finance Bill), or simply consigned instead to the waste bin.

Also unchanged is the proposed annual limit on DC contributions and growth in accrued DB rights of £200,000 (RPI indexed annually, like the LTA); except this will not apply for a year in which the accrued benefits are taken in full.

A reduction from 33.3% to 25% in the recovery charge on funds exceeding the LTA is proposed, with the excess available as a lump sum less 55% tax (25% recovery charge + 40% income tax on the residue). Funds held in schemes outside the simplified regime will not be counted, though there will be no separate tax advantages for such schemes.

By opting out of making any further contributions or accruing further service in any registered scheme, those with pre A-Day accrued rights above £1.4m will be able to secure "enhanced protection" (ie exemption from the recovery charge on all benefits coming into payment after A-Day, not just those based on the pre-A-Day value x RPI). Some protection of pre A-Day early retirement options is to be permitted. Incapacity early retirement will continue.

Protection for pre A-Day TFC rights, including where these exceed 25% of the fund, will also be available. (The arrangements for "transitional protection" are more complicated than originally proposed - an inevitable consequence of successful lobbying.) Otherwise, occupational schemes and s.32 buyouts will be able to pay 25% TFC, in line with personal pensions. The trivial commutation limit will be substantially increased to £14,000, indexed annually. Serious ill-health commutation will be extended to RACs and PPs.

There will be a single set of investment rules, including

• residential property will be allowed (non-commercial use by a member would be taxable);
• 5% limit on shares in the sponsoring employer;
• loans to members are banned;
• loans of up to 50% of assets to the employer allowed, subject to strict constraints;
• scheme borrowing limited to 50% of assets value.

Annex D poses a number of questions for feedback by 5 March 2004.