The latest Newsletter from HMRC Pensions Schemes Services (No. 47) this week drew attention to sixteen sets of draft regulations required to ensure the reduced annual and lifetime allowance, and the changes to remove the effective requirement to annuitise by age 75, work as intended under the Finance Bill.

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It is intended that these regulations will be laid immediately after the Finance Bill receives Royal Assent, coming into force 21 days later. This means that the regulations supporting fixed protection*, the payment of annual allowance charges from scheme benefits and the modification of scheme rules will not have effect until the end of the 21 day period.

* the fixed protection election form will not be available until after the Bill receives Royal Assent and the associated regulations which prescribe the requirements relating to the notification process come into force around the middle of August, after which the form will be placed on the HMRC website. Completed forms must be received by HMRC by 5 April 2012.

Additionally, on 13 June, an updated version of the Finance Bill was published showing changes made in committee of the whole House and in Public Bill Committee. Amendments to the pensions provisions are sidebarred on pages 41-2, 277, 295, 297-9 and 303.

PSN 47 also discusses research to improve the RAS (Relief At Source) process; the calculation of the pension input amount in DB arrangements (with several examples); the amended PIP rules; a consultation on employer asset-backed pension contributions (see below) and the Equitable Life Payments Scheme (ELPS) and its design). The ELPS will provide entirely tax-free payments under SI 2011/1502, published this week.

Consultation on tax rules around employer asset-backed contributions to DB schemes

Asset-back funding arrangements have largely emerged as a means to address defined benefit scheme funding deficits. These arrangements allow an - usually large - employer to use non-cash assets to underpin and act as a guarantee for regular, qualifying cash contributions or income streams to the pension scheme. They can also lead to an extended recovery period.

The proposed changes will limit the perceived unintended tax relief that can arise from the ways some contributions are structured. The aim is to ensure that the amount of tax relief given to employers accurately reflects the value of the contributions received by pension schemes, while preserving flexibility for both employers and pension schemes to use these arrangements to manage pension deficits.

Stating that the current situation is untenable, the Government proposes two options for change:

• Option A – providing relief only when cash is received by scheme

  This would remove automatic upfront tax relief for asset-backed contributions. Instead, employer tax relief would be given only when cash actually changes hands between the employer and the pension scheme, or when the scheme acquires full title to an asset that can readily be converted into cash (for example a traded security). This option would undoubtedly result in increased reporting requirements - ie deciding whether the asset is sufficiently close to cash, then reporting to and agreeing a valuation with HMRC.

• Option B – aligning tax rules with accounting rules

  This would involve amending existing tax rules to ensure that the tax treatment of the arrangements as a whole (not just the part that governs tax relief for pension contributions) accurately reflects the economic substance of the transaction. This means that the tax treatment of the arrangements would generally follow the relevant accounting rules over the period of the arrangements. The main difference would be that where arrangements are recognised as financial liabilities in the accounts, upfront relief based on the accounting value of the asset would be available. If they are accounted for as equity, upfront pensions tax relief would not be available.

The consultation commenced on 24 May 2011 and will end on 16 August 2011.

Other noteworthy publications from HMRC this week

• Pensions Industry Business Update Issue 1 June 2011 from NISPI (formerly the NISPI Newsletter): invaluable for administrators of contracted-out benefits.

• CA 17 Employee’s Guide to Minimum Contributions: a revised version (although still dated April 2011)

• A new update to the Registered Pension Schemes Manual (RPSM): we have not given this event its usual prominence on this site because on this occasion, almost all the changes simply involve the addition of a page header directing the reader to draft guidance, for events on or after 6 April 2011. The Manual itself cannot cover the changes being wrought by the Finance Bill until after it gains Royal Assent.