Although there was little about pensions in the Chancellor's speech, Wednesday's Budget documents contained a few new items. We already knew about the 49 proposals to modify the Finance Act, announced in brief by the Inland Revenue on 16 February 2005. This document is referred to in a new Appendix [PDF] to the Regulatory Impact Assessment for Pension Simplification, but we are not really any the wiser. The Finance Bill is expected to contain the details.

There will be a consultation [PDF] about the best way to resolve a "mismatch" in the Finance Act 2004, whereby a different pension commencement lump sum (aka tax-free cash) may be obtained from a money purchase arrangement by taking a scheme pension rather than a lifetime annuity. Under the Act as it stands, the lump sum is a multiple of the pension, so the larger the pension the larger the lump sum; the member has a strong incentive to choose a level single-life pension, even if married. Under a lifetime annuity, however, the lump sum is simply 25% of the fund: the amount cannot be influenced by the decision on escalation or dependants' pensions, because this is based on the residual fund after cash. Any change in the law will be announced in this autumn's Pre-Budget Report (PBR) and included in next year's Finance Act (although it will almost certainly be made retrospective to 6.4.6).

In a further announcement, the Government said schemes will be allowed two more years to amend their rules to fully reflect the new tax regime, ie until 6 April 2011. The Government also plans to make an unspecified number of "further minor and technical provisions" to the simplification rules.

The other Budget news concerned the Pension Protection Fund (PPF). An accompanying Budget Note [PDF] explains that the PPF will be a body corporate, which means that it will ordinarily be liable to pay corporation tax on its income and gains. It will be funded by statutory levies on eligible schemes, for which tax relief will not necessarily be given. As the PPF will not be a pension scheme, it would not be able to pay tax-free lump sums. Fortunately, the Government plans legislation to put the PPF on the same tax footing as tax-privileged pension schemes.

Up to 5 April 2006, the PPF will benefit from the tax treatment of an approved occupational pension scheme. After that date, the PPF will benefit from the tax treatment of a registered pension scheme. Tax relief will be allowed for payment of the statutory levies to the PPF, for example where a sponsoring employer provides a scheme with funding for the levy payments.

Other Budget announcements on pensions mostly reiterated changes flagged up in last December's PBR, notably

* The earnings cap for 2005/06 is formally declared (SI 2005/720) [PDF] as £105,600.

* For all members of occupational schemes, a salary cap (£100,000) was introduced in 1987 above which final remuneration has to be calculated as an average of 3 or more consecutive years' remuneration. From 6 April 2005 this salary cap will also increase to £105,600 from its existing level of £100,000 (SI 2005/723) {PDF}.