In recent years the Chancellor's Budget Speech has hardly mentioned pensions, and this week's was no exception. The only specific measure came right at the end - a one-off increase in the winter fuel allowance (£100 to households with someone aged 80+ and £50 if over 60). We have learned, however, to plough through the dense surrounding foliage of Budget Notes - 107 of them this year, Impact Assessments, and other supporting documents to discover changes to the pensions tax regime.

Every year since FA 2004 the Government has found it necessary to modify the new simplified pensions tax regime. In contrast to previous years when nasty surprises have been sprung on the industry, this time the changes will be generally welcomed. HMRC has been listening to arguments that some particular aspects of the FA 2004 regime were creating an unfair administrative burden, as well as being unfair to scheme members. Some of the proposed changes were announced earlier at the time of the October 2007 PBR; more interesting were those that were new.

Unauthorised Payments

HMRC has recognised the force of arguments made by Aries and many others that payments made in error or unavoidably, including lump sums deriving from very small pensions which cannot be paid as trivial commutation lump sums, were not intended to be caught by the unauthorised payment rules and therefore should not be treated as such.

Accordingly, there are to be two new additional trivial commutation rules:

1. occupational pension schemes will be permitted to unilaterally trivially commute benefits valued below £2,000, ie a pension below about £100 pa (see Budget Note 42). This will apply even if the aggregate value of benefits held under all registered pension schemes exceeds 1% of the LTA (£16,500 in 2008/09). This scheme-specific option will not be extended to personal pension schemes because of the risk of abuse. Because it is relatively easy to set up multiple PPs HMRC believes people would do that deliberately to fund for triviality; whether such behaviour actually would be widespread, with a limit as low as £2,000, is debatable.
2. for all schemes, new regulations will allow what HMRC terms 'stranded pots' (ie very small funds) to be trivially commuted in specific circumstances. No details are provided.

Aries comment: the £2,000 scheme-specific limit is welcome, although rather miserly. We have argued that small funds with a capitalised value not exceeding 0.5% of the Lifetime Allowance should be permitted to be paid under the trivial commutation rules. We believe that this limit need not be construed as particularly generous, because if the pre-A Day £260 pa limit is increased in line with RPI from the date of its introduction (28 February 1991) to the present day, and multiplied by 20 to attain its capital value, the figure obtained is very close to £8,000, ie 0.5% of the current LTA. This approach also has the obvious merit of automatically increasing to keep pace with inflation. History suggests that a fixed threshold may not be revisited for many years.

Budget Note 42 states that the Finance Bill 2008 will provide for existing regulation making powers (FA 2004 s.164(f)) to be amended to:

• simplify the administration of certain trivial commutation payments; and
• allow certain payments from pension schemes to be taxed in the same way as other authorised payments made by pension schemes instead of as unauthorised payments.

The new law will enable regulations to define payments to be treated as authorised. This can be done already under s.164(f), but crucially, the regs made under that section cannot provide for taxation of prescribed authorised payments. The new legislation will ensure income tax law is applicable where appropriate. It is intended to come into force from the date of Royal Assent to the Bill. However, the regulations made under this power may have retrospective effect, where this will not disadvantage anyone affected.

HMRC's Impact Assessment identifies three further situations where pension schemes make unauthorised payments, "often in innocent error", which were not intended to be caught in this way:

1. an overpayment of an ongoing pension
2. a pension payment made after the member has died
3. certain payments made after the member has died where payment before death was not possible (for example, because the scheme did not know where the member was living when benefits became payable, or where to send the payments).

HMRC recognises that it is often difficult, distasteful, disproportionately costly and sometimes undesirable for schemes to recover overpayments, but if they do not the payment becomes unauthorised. In the third situation, dependants are disadvantaged, which is inequitable.

To make these payments taxable authorised payments instead, the Government will amend the existing regulation making power within s.164(f) to

• allow regulations to have effect for payments already made provided it does not increase the person's liability to tax;
• describe in regulations how these payments must be treated for income tax purposes and who the tax charge should apply to; and
• ensure that payments can be tested against the lifetime allowance if necessary.

Aries comment: we are convinced there are many more situations like these where unauthorised payments do not deserve - and were never intended - to be treated as such under FA 2004 (see previous article). We understand HMRC is continuing to review these in the light of information emerging from this year's Event Reports. In company with other industry bodies we are continuing discussions with HMRC, not only, we hope, to see the scope of corrective legislation extended, but also alternative mechanisms developed to avoid the need for new regulations to cover each new problem.