On 29 July, 2014, HMRC published the above draft Order which will make several technical changes to the annual allowance regime.
The main changes, which will be made to the Finance Act 2004, are set out in brief below:
The following amendments will apply retrospectively from the start of the 2011/12 tax year:
- Pre-2006 deferred members – an existing anomaly will be corrected to protect individuals who became deferred members before 6 April 2006, then resumed accrual in a DB or cash balance arrangement. Under current legislation, the opening value of the member’s pension input amount is not calculated by reference to the entirety of his deferred benefits, resulting in an excessive pension input amount arising over the pension input period (PIP). The amendment provides that the opening value will instead be the value of the member’s benefits that have built up before the start of the PIP and his pension input amount will simply be the further accrual during the PIP.
- Transfers – a deferred member of a DB or cash balance arrangement who transfers to another registered pension scheme continues to benefit from the deferred member carve-pout after the transfer. This means that his accrued rights may increase each year up to a specific limit without counting towards the annual allowance.
- Revaluation – schemes may continue to revalue a deferred member’s accrued rights by RPI instead of CPI without this increase counting towards the annual allowance, so long as rules specifying RPI as the relevant index were in force on 6 April 2012.
- Paying a charge – an anomaly is removed where the annual charge payable by a member is less if he uses scheme pays than if he pays it himself. This change comes into force for charges arising on or after that date that the draft Order comes into force.
- Electing to use scheme pays – a member can use scheme pays under certain circumstances if he has taken only part of his benefits. The change will apply for elections to use scheme pays made six months after the draft Order comes into force.
- Transferred schemes – the Order will clarify that a receiving scheme is liable under scheme pays on an individual transfer, as well as on a block transfer. The change will apply to transfers made on or after the day the draft Order comes into force.
Money purchase arrangements
Excess contributions – in calculating an individual’s pension input amount, “contributions” to a money purchase arrangement do not include excess contributions payable by or on behalf of the member during the PIP, but which are returned to the member as a refund of excess contributions lump sum made in a PIP ending in the 2014/15 tax year or a later year.
Underfunded block transfers
HMRC first consulted in 2012 on this issue. The measures are designed to ensure no unintended pension input amounts arise as a result of a transfer where members' benefits are unchanged but the transfer amount does not support the value of the accrued benefits in the receiving scheme on account of underfunding. In light of feedback from the industry suggesting the original drafting did not achieve the intended aim, HMRC promised to look again at the position. The draft order contains revised provisions.
The consultation period closes on 27 August 2014.