New measures announced by the Chancellor in today's Pre-Budget Report will kill interest in Alternatively Secured Pensions (ASPs) from all but the most resolutely antipathetic towards annuitisation. Changes will be made to the tax rules on members' and dependants' ASPs to:

• introduce a minimum income requirement of 65% of the annual amount of a comparable annuity (for a 75 year old) that could be purchased with the sums and assets in the fund (presently there is no requirement to take any income). Failing to comply with this requirement will mean that the scheme administrator will become liable to a 40% charge on the difference between the minimum income limit and the amount paid as pension income in the year (this risks causing real administrative hassle and pain for providers with significant numbers of 'gone-aways', ie deferred members aged 75 or over with whom contact has been lost. HMRC will discuss with interested parties what alternative provisions are needed for those cases, to minimise the costs while ensuring an appropriate outcome for the member. For further details contact Angela Walker on 020 7147 2820 or angela.walker1@hmrc.gsi.gov.uk);
• remove from the authorised payment rules the transfer lump sum death benefit option; this will impose an unauthorised payment charge of up to 70% where, on the death of a member or on the death of a dependant of the member, any remaining ASP funds are transferred to the pension funds of other members of the scheme (thus a fund of £100k would be reduced first by the new 70% total tax charge to £30k and then after a 40% IHT charge leave just £18k for the beneficiary); and
• remove the facility to make payments under a guarantee from an ASP fund.

If that is not enough, the Government further threatens to remove access to ASPs altogether "if these proposals prove unworkable, or there is continued evidence of the use of pensions tax relief to provide capital sums throughout retirement."

Some background notes to these decisions are included in a partial Regulatory Impact Assessment [PDF] also issued today. HMRC confirms in PBRN 13 [PDF] that members of registered pension schemes who either already have ASP funds, or will shortly be in that position, will be able to reorganise their affairs to prevent them becoming liable to the tax charges imposed by the removal of the transfer lump sum death benefit facility as an authorised lump sum death benefit and by the removal of the guarantee facility for ASPs.

The new ASP rules will also

• increase the maximum annual withdrawal of income that is permitted from an ASP fund to 90% of the annual amount of a comparable annuity (for a 75 year old) that could be purchased with the sums and assets in the fund (this change is unlikely to excite much interest); and
• allow charity lump sum death benefits to be paid at the nomination of the scheme administrator, where there is no member nomination (given that where there is no surviving dependant, a charity lump sum death benefit is now in effect the only option, this change is welcome).

It gets worse. Stand-alone pension term assurance (PTA) is also under threat. Having finally noticed PTA and furthermore decided it isn't in the spirit of the new pensions tax regime, in the run-up to 6 April 2007 the Government says it will "work with the pensions industry . . to explore how the FA 2004 principles can be applied to pensions term assurance contracts*". Although it says any changes made "will not affect either personal arrangements entered into before 6 December 2006 or existing types of employer arrangements", a very substantial long-term investment made by providers, quite legitimately, is seemingly under threat.

* For further details you can contact Stephen Webb on 020 7147 2872 or Stephen.t.webb@hmrc.gsi.gov.uk or Martyn Rounding on 020 7147 2821 or Martyn.Rounding@hmrc.gsi.gov.uk

The Government's attack on those who relied on the legislation instead of the policy intention which may have been behind it is not limited to ASPs and term assurance. For example, HMRC has "become aware of" plans to use the rules for scheme pensions in order to preserve the maximum remaining pension pot on death of a scheme member and allocate this to the pension funds of other members of the scheme, who were connected with the deceased, so reallocation via a family pension scheme looks vulnerable. A tax charge will be imposed from 6 April 2007.

On the plus side, a package of easements (PBRN 14) [PDF] has been announced today that are intended to deliver technical improvements to the tax rules. These are explained in detail in the partial Regulatory Impact Assessment [PDF] mentioned above. Although in general they will be included in next year's Finance Bill, some measures the PBRN states will have effect from 6 April 2006, ie retrospectively.

These technical improvements will introduce easements to the rules on:

1. Transitional protection on transfer from the lifetime allowance charge, including
   • partial transfers (from 6.4.2007);
   • bulk transfers of employees due to the sale of a business (from 6.4.2007);
   • transfers to new occupational death-in-service arrangements (retrospectively from 6.4.2006); and
   • where the terms of a life policy in an occupational scheme are varied to comply with the Age Directive (also with effect from 6.4.2006).
2. Ill-health pensions - to allow scheme pensions paid early on ill-health grounds to be reduced at the discretion of the scheme administrator to help schemes to manage the costs of paying ill-health pensions in circumstances when it would not be appropriate under the scheme to stop the pension altogether. This welcome change will be included in Finance Bill 2007, and will have effect on and after 6 April 2006 (sic).
3. Pension commencement lump sums (PCLS) - so that a PCLS may be paid within 12 months of the member becoming entitled to the related pension and if this 12 month period falls in part after the member reaches the age of 75, the lump sum may still be paid. This too will be included in the Bill, but with effect from 6 April 2006.
4. The 2 year time limit on the payment of lump sum death benefits where the individual member dies on or after 6 April 2006 - to allow lump sum death benefits to be paid within 2 years of the scheme being notified of the member’s death, but if the scheme could have been reasonably aware of the member's death at an earlier date then the time limit will be 2 years from that earlier date. Another very welcome change which will to apply to payments on or after 6 April 2008 in respect of deaths on or after 6 April 2006.
5. Unsecured pension (USP) funds - members will be able to request a review of the annual maximum withdrawal from a USP fund at the end of each unsecured pension year. The requirement that the maximum withdrawal must be reviewed at least every 5 years will remain. The change will have effect on and after 6 April 2006.
6. Winding up lump sums - a change to the winding-up lump sum rules so that the conditions that need to be met by the employer apply only to the member's current employer at the time the winding-up lump sum is paid and not to any previous employer. This will reduce the administrative burden on schemes winding up and help to speed up the winding up of schemes. The change will have effect on or after 6 April 2006.
7. To establish a (non-occupational) registered pension scheme - instead of having to belong to one of a number of categories set out in current legislation (bank, insurance company etc), a person will need permission from the Financial Services Authority, with effect on and after 6 April 2007.

HMRC will consult with the industry on several other matters of current concern:

1. Lifetime Allowance - the way in which two of the rules around the Lifetime Allowance operate: for pension increases (benefit crystallisation event 3); and for the dependants' scheme pension. The Government intends any changes to be included Finance Bill 2008 and to have effect on and after 6 April 2008.
2. Trivial commutation lump sums - currently the cause of possibly the largest number of member complaints and irritating hassle which administrators could do without. HMRC has been under sustained pressure to come up with something more practical than the excessively complex rules now in force. Before anyone gets too excited, however, the Government is going to be very cautious about changing the Act and has set out the following underpinning principles. The trivial commutation rules:
   • need to ensure that individuals at the lower end of income scales are not adversely impacted;
   • should include a key focus on how to encourage or facilitate amalgamation of an individual's small pension funds in order to produce an economically viable total fund;
   • should balance the needs of scheme administrators and members of both personal and occupational defined benefit and money purchase pension schemes;
   • should take into account the need not to have any additional Exchequer cost;
   • should not be open to manipulation, for example, by allowing individuals to fragment their pension savings between different schemes in order to receive taxed lump sums instead of purchasing annuities that provide an income for life;
   • should not undermine annuitisation policy; and
   • should, where possible and where compatible with the above, ensure significant administrative savings for the industry and not result in increased HMRC administrative costs.
3. Non-cash benefits that former employers provide to pensioners - the Government will review:
   • how the current £100 lower limit applies to low value benefits across different categories of expenditure for less well-off pensioners; and
   • how the tax treatment for non-cash benefits provided to pensioners compares to the treatment of employee benefits.

For further details about these additional proposals contact Anne Stubbs on 020 7147 2844 or Anne.Stubbs@hmrc.gsi.gov.uk

Other news

Annuities

In the May 2006 Pensions White Paper Security in retirement: towards a new pensions system the Government promised a paper on annuities. In that paper, The Annuities Market [PDF], also published today in response to the Pensions Commission's second report, the Government rules out changing the age-75 rule, or placing a cash limit to the amount which individuals are required to annuitise, or issuing longevity bonds.

Taxable property

Under the Finance Act 2006, 'investment-regulated pension schemes' (ie basically, SIPPs and former SSASs) that hold taxable property (including residential property) may be subject to a tax charge of up to 70% on the value of that property. However from 1 January 2007, if they invest in UK Real Estate Investment Trusts (UK-REITS), under current legislation they escape this charge - unless the investment is made to enable a member of the pension scheme or a connected person to occupy or use taxable property. PBRN 15 [PDF] sets out a a further condition which will apply from 1 January 2007: the holding in a UK-REIT by the pension scheme and associated persons must be less than 10%.

State pension

The Chancellor announced in his speech that the basic state pension will rise next April by 3.6%, in line with price inflation, and the pension credit minimum guarantee will rise by £5 for single people and £7.65 for couples.

Age discrimination