The main announcement on pensions in today's 2008 Pre-Budget Report affects only members who on or after 6 April 2011

1. take pension and lump sum benefits valued at more than £1.8 million and do not have existing transitional protection; or
2. contribute more than £255,000 into a registered pension scheme.

These figures represent the lifetime allowance (LTA) and annual allowance (AA) limits already set (see SI 2007/494) for the tax year 2010/11.

The industry had expected the LTA and the AA to continue to rise year-on-year in line with either prices or earnings, but today's announcement by the Chancellor freezes the limits at the 2010/11 level for the following five tax years. Benefits taken or contributions paid in excess of the allowances by members affected will be subject to tax penalties: a 55% LTA charge (25% if the excess is taken as a pension) or a 40% AA charge.

Otherwise, pensions hardly featured in today's PBR. From 6 April 2011, all rates of National Insurance Contributions are to increase by 0.5% for people earning over £20,000 per year. Class 1 and Class 4 NICs will be increased to 11.5% and 8.5% respectively, and Class 1 employer NICs will rise to 13.3%. Combined with changes from April 2010 to the income tax personal allowance, which is to be halved for people earning over £100,000 pa and eliminated for those on over £140,000, this might provide a boost to salary sacrifice arrangements.

Meanwhile, an SI which has been in gestation since last February (see Aries article) was finally born last Friday as The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2008 (SI 2008/2990) and comes into force on 1 January 2009. The key articles have been backdated to 6 April 2006, however. This Order is made under FA 2004 s.283(3C) (inserted by FA 2006 Sch 23 para 35(2)), which allows for such instruments to have retrospective effect.

The Order amends the Taxation of Pension Schemes (Transitional Provisions) Order 2006 (SI 2006/572) in two respects. The first concerns bridging pensions. Schedule 28 FA 2004 includes rules about what qualifies as a "scheme pension". One condition is that it may not reduce from one year to the next except in specified circumstances, one of these being where there is a "bridging pension" i.e. where a pension is initially paid at a higher rate until (usually) the state pension comes into payment, at which point it is then reduced. Prior to 6 April 2006, some pension schemes' rules allowed for greater reductions as a result of bridging pensions than are permitted under Schedule 28. If the scheme reduces the pension outside the permitted circumstances, the pension will no longer be a scheme pension and will be treated as an unauthorised payment under section 160. On the other hand if the scheme only made a reduction in line with the Act, then the member would receive a greater pension than they were entitled to under the scheme rules and the scheme may not be sufficiently funded to meet this increased financial obligation.

Following representations from the pensions industry, HMRC announced on 3 July 2007 the intention to provide a remedy to this dilemma. By inserting a new article 5A in the 2006 Order, the new Order modifies FA 2004 Sch 28 para 2(4) to allow a further case where payment of a reduced pension will qualify as a "scheme pension". The effect is to ensure that where pensions that were in payment before 3 July 2007 are reduced in accordance with their pension scheme’s pre-6 April 2006 rules, and this reduction is greater than would be permitted otherwise, then the member will not be subject to any unauthorised payments charge. The scheme sanction charge will not apply either.

HMRC has taken the opportunity to add a further article, not part of the earlier consultation draft, to simplify a complex calculation relating to transitional protection of rights to receive certain tax-free lump sums. In general the transitional protection for a higher PCLS permits increases in value from 6 April 2006 in line with increases in the LTA. Where the member's rights under the scheme increase at a faster rate than the LTA, the member can have an additional lump sum tax-free, but - until this year - only where "relevant benefit accrual" had occurred. Representations were made that this made the administration too complicated and in particular that it was often difficult to determine when relevant benefit accrual had occurred in respect of a defined benefit arrangement. In response, FA 2008 Sch 29 para 13 removed (retrospectively to A-Day) the condition that there had to have been a relevant benefit accrual before the member could be entitled to an additional lump sum tax-free.

The same administrative complications arise when a member with accrued rights to a higher PCLS at 5 April 2006 has subsequently transferred part of their pension rights to another registered pension scheme. Article 4 of this Order consequently amends art. 23 of the 2006 Order to remove the requirement for there to have been relevant benefit accrual. The changes mirror those made by FA 2008 described in the previous paragraph. There is now only one rule, instead of two, with the presence or absence of "relevant benefit accrual" no longer relevant. The resulting rule is potentially more generous, because it allows for the possibility of an additional lump sum allowance (ALSA) to be taken into account in determining the "permitted maximum" up to which lump sums may be paid without incurring tax.

Several other draft pensions tax SIs are currently 'missing in action', notably

• The Registered Pension Schemes (Modification of the Rules of Existing Schemes) (Amendment) Regulations 2007, of which a draft appeared in March 2007.
• a draft Order amending The Pension Schemes (Transfer, Re-organisation and Winding Up) (Transitional Provisions) Order 2006 (SI 2006/573) (4 September 2007).
• a draft of The Registered Pension Schemes (Authorised Payments) Regulations 2008 (23 May 2008), and associated with this, a review HMRC announced in PTSN 34 of the practical application of the legislation for raising the scheme sanction charge and obtaining a deduction against that charge for the tax paid by the member on the unauthorised payments made to them. It is hoped that the outcome of these consultations will provide an acceptable remedy for the serious administrative difficulties created by the current regime (see Aries article).
• a draft of The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 200 (1 July 2008) - which will now have to be renamed - making a minor change to the definition of a dependant.

In addition, we await draft regulations which HMRC announced on 25 July 2008 to prevent inadvertent tax consequences where a member's scheme pension is reduced in the course of the winding-up of their pension scheme.

Aries has placed these matters on the agenda for this week's meeting of the HMRC Pensions Customer Forum. A report will appear here in due course.

Other news from HMRC

RPSM Update

A major tranche of amendments to the Registered Pension Schemes Manual was announced earlier this month. We have examined the list in full detail and shall be submitting a report to HMRC on certain problems we have identified. Aries Members may obtain a copy of this report on request.

Extra-statutory concessions

HMRC has launched a consultation on ESCs (ie any published concession from the statutory tax treatment), which have been a feature of the UK’s tax system for decades. The House of Lords' decision in the Wilkinson case made clear that the scope of HMRC's administrative discretion to make concessions that depart from the strict statutory position is not as wide as previously thought. In light of that decision, HMRC is reviewing its published concessions and while the indications are that most ESCs will be able to continue in their current form as they are within the scope of HMRC’s administrative discretion, where an existing concession exceeds the scope of the discretion of the Wilkinson judgment the effect of the concession will be maintained by putting it on to a legislative basis where it is appropriate to do so.