Once again the Budget betrays rampant Treasury paranoia about perceived 'abuses' of the pensions tax regime. Unmoved by industry pleas for a rational and balanced response, the Government has decided to stick with the plans for ASP and PTA announced in the December 2006 Pre-Budget Report (PBR) - see Aries report).

Pension term assurance (PTA)

PTA was available in connection with a personal pension under the old regime, but limits and restrictions made it unattractive. Under FA 2004, standalone PTA became allowable and a significant new market opened. This gave those without access to occupational schemes the opportunity to benefit from similarly tax-advantaged life cover, although not from the lower premiums available under group life arrangements. A lot of people who would not otherwise have been likely to take out life cover were persuaded to protect their families by the lower net cost of PTA.

Unfortunately, and notwithstanding the fact that group life-only schemes remain, the Government is withdrawing tax relief [PDF] on individual contributions to personal term assurance policies - even if they are linked to a pension - "in line with the principle that pensions tax relief is provided to produce an income in retirement". As the relief available for contributions paid by employers is unaffected, a clear bias will be introduced into the FA 2004 pensions tax regime, in favour of group life under occupational schemes and against personal pensions.

This change [PDF] will be made by the Finance Bill 2007. For new contributions in respect of personal term assurance policies under occupational registered pension schemes, this measure will have effect from 1 August 2007, unless the insurer received the application for the policy before 29 March 2007 and the policy was taken out as part of the pension scheme before 1 August 2007.

For contributions under other registered pension schemes, it will take effect for all contributions made on or after 6 April 2007 in respect of personal term assurance policies, unless the insurer received the application for the policy before 14 December 2006 and the policy was taken out as part of the pension scheme before 6 April 2007.

Where relief remains available for contributions paid on or after 1 August 2007 (for occupational schemes) or on or after 6 April 2007 (for other schemes), the individual will cease to be entitled to relief if the policy to which the contribution relates is varied outside its original terms so as to increase the sum assured or lengthen the term. However, if there is an option under the policy which is then exercised this will not affect the relief due.

The Finance Bill legislation will also provide new powers to pass secondary legislation which will enable the Government to act quickly to remove relief from new products sold with a view to avoiding the new restrictions on tax relief. This supplements existing powers that provide for specified types of payment by registered pension schemes to be treated as unauthorised payments.

Alternatively secured pension (ASP)

Legislation will also be included in Finance Bill 2007 to tighten up the provisions for the operation of members' and dependants' ASP funds. This includes the introduction of a requirement to draw a minimum income from an ASP fund and a tax charge where ASP funds remaining on the death of a member are transferred to the pension funds of other members in the scheme. The Government has been unmoved by widespread outrage at the 82% total tax charge which will result (assuming Inheritance Tax (IHT) applies to the benefits concerned).

In a tiny concession [PDF], the unauthorised payment charges to be introduced in Finance Bill 2007 on the transfers of funds to other members of the scheme on the death of the ASP member (i.e. the removal of the transfer lump sum death benefit facility) will not have effect where the member or dependant died on or before 5 April 2007: the draft legislation published at PBR was to apply to deaths after 6 December 2006.

Untraceables at age 75

Some positive decisions [PDF] have been announced today on how to deal with this awkward group. For providers that have been using the ASP measures as a means to hold in suspense the funds of members that they have been unable to trace by age 75, alternative provisions will be included in Finance Bill 2007. Schemes will need to take reasonable steps to trace a member. Providing schemes do not know the whereabouts of the member, then the funds, (which under FA 2004 Sch 28 para 8(2) are deemed to be designated into unsecured pension) will on their 75th birthday effectively become held in suspense, and will not become ASP funds.

There will be no requirement to operate a minimum income on these pension arrangements, while the member can't be traced. If and when the member is subsequently traced he will have the choices available at age 75, and if he doesn't make a decision within 6 months of being traced then the minimum income requirement (to be set at 55% of the annual amount of a comparable annuity for a 75 year old) will start to apply. Where the pension scheme becomes aware that the member has died (after age 75), the options are a charity lump sum death benefit or a pension for a financial dependant; any reallocation to the pension pots of other members will trigger an unauthorised payment charge.

Section 268(6) FA 2004 will also be amended to ensure, for example, that the scheme sanction charge may be discharged where it would not be just and reasonable to apply it in certain circumstances where there has been a failure to operate the minimum income requirement.

Preventing inheritance of tax-privileged pension savings

As if this further clampdown on ASP wasn't enough, a consultation [PDF] has been announced today on more measures that will be introduced to prevent ways of inheriting tax-privileged pension savings. The target is the use of scheme pensions and annuities to pass down tax relieved pension saving to connected persons on death. The Government intends introducing measures that will impose pension tax and IHT charges on such arrangements to closely reflect those that will apply to ASP funds that remain on the death of a member.

It is intended that provisions will apply to all existing arrangements that have been put in place that will enable capital to be passed on death to connected persons. It is not intended that these changes would affect arrangements where the member or dependant died before the introduction of the measures.

The consultation poses the following questions:

Q1 - Are there schemes with longstanding arrangements, which existed before 6 April 2006, that are paying scheme pensions and will be adversely affected by charges being introduced? Please provide details.

Q2 - Measures will apply where rights of a person connected to the deceased are increased (except as authorised benefits). Are there any easements to this rule that would help with the administration of schemes where it would be onerous to find out information about connected persons from members or their survivors, but which do not provide a route to avoid the rule in circumstances where it is intended to apply?

Q3 - These measures will be introduced at the earliest opportunity. Are there any cases where there would need to be an interval between the date the legislation was published to the date it becomes effective to allow individuals to reorganise their arrangements? If so, please give specific details.

Q4 - Are there any circumstances in which schemes would currently increase the pension rights of connected persons in schemes where a member with a scheme pension died before age 75? If so, please give specific details.

Q5 - Would charges that applied affect the administration by insurance companies of annuities, where the funds backing those annuities are pooled across a large group of individuals? If so, are there any easements to the rules which would help the administration, but which do not provide a route to avoid the rule in circumstances where it is intended to apply?

Comments are invited by 13 June 2007.

Technical changes to the FA 2004 regime

As announced in the PBR [PDF], legislation will be introduced in Finance Bill 2007 to modify the pension tax rules, including changes to

• Investment-regulated pensions schemes and UK Real Estate Investment Trusts (REITS)
• Transfers and transitional protection
• Ill health retirement
• Pension commencement lump sum rules
• Unsecured pension fund rules
• Two year time limit on lump sum death benefits
• Winding up lump sums – conditions to be satisfied
• The establishment of schemes.

In addition, the following measures were announced today [PDF], to be backdated to 6 April 2006:

1. PBR Note 14 announced that HMRC would discuss concerns raised over the tax charge and administrative burden involved in the non-cash benefits (eg Christmas turkeys, we supposed) that former employers provide to pensioners. Minor non-cash benefits provided by former employers for retired former employees will be excluded from taxation. The list of "excluded benefits" on which there is no tax charge, specified in draft regulations published today, includes continued provision of accommodation and related removal expenses, welfare counselling, recreational benefits, annual parties and similar functions, equipment for disabled former employees, which, with necessary differences to reflect the situation of retired people, mirror exemptions conferred on employees. Exclusions also relate to the writing of wills, and benefits which were first provided before 6 April 1998.

2. The IHT pension rules will be amended to allow the exemption from IHT charges to operate within the same time frame as permitted by the rules of a registered pension scheme for payment of lump sum benefits following the death of a scheme member.

3. Two anti-avoidance rules will be introduced, to ensure that

1. the payment of unauthorised member and employer payments cannot be structured to reduce the overall tax charge on the scheme and the member or employer (this will involve changes to FA 2004 s.160); and
2. flexibilities which are being introduced in Finance Bill 2007 on scheme pensions paid early on ill-health grounds do not prevent the existing anti-avoidance arrangements from applying (FA 2004 Sch 28 para 2A(4) to be amended).

4. IHT rules: the pension tax rules for registered pension schemes will be amended so that the two-year time period allowed for payment of a lump sum death benefit will run from the date on which the scheme is notified of the death or if earlier, the date the scheme could have reasonably been aware of the member's death. This timing will be mirrored for IHT in Finance Bill legislation so that provided lump sums are paid within the time allowed by the pension scheme rules on or after 6 April 2006 the scheme funds will not attract charges under sections 64 to 69 of IHTA. Failure to meet the deadline will have the effect, as before, that the protection from the IHT charges will have ceased at the date of death of the scheme member.

Two further issues raised in the PBR have yet to be resolved.

1. HMRC have started the process of discussions about Trivial Commutation, which are focussing on possible ways in which the present requirement for amalgamation of all benefits under registered pension schemes can be scrapped in favour of a scheme-based triviality rule. Any changes which may emerge from this process will not be enacted before the Finance Bill 2008.

2. The consultation period about improvements to one of the lifetime allowance tests (BCE3) and Dependants' Scheme Pensions has now closed and the contributions are in the process of being analysed. There are real grounds for optimism that some reduction in the present administrative burdens in these areas will be forthcoming.

Financial Assistance Scheme

Finally, somewhat counterbalancing the bad news for pensions, the Government has responded to sustained pressure from the campaign to assist those who lost significant amounts when their pension schemes started winding up as a result of the sponsoring employer becoming insolvent, and also to the several adverse judgements against it on this issue (notably the recent ECJ ruling in the ASW case).

In a single short paragraph towards the end of his Budget speech the Chancellor announced that the Government will now extend the Financial Assistance Scheme to include an additional 85,000 people, ensuring all 125,000 who lost their pensions will benefit to some extent. This will bring the Government's estimated total long-term expenditure on the FAS to £8 billion.