Below is a summary of the main provisions relating to pensions contained in the Budget delivered by Gordon Brown on 21 March 2007.
Alternatively Secured Pension (ASP) Rules
What is an ASP?
ASP is the formal name for the rules allowing a member of a pension scheme who reaches age 75, to draw down income, and avoid having to buy an annuity. These rules were introduced from 6 April 2006, and allowed a member to draw an income of between 0 per cent and 70 per cent of the annuity which he could have bought with the fund (subject to income tax). This amount was retested annually but always on the basis of the annuity a 75 year old could have taken. On death, any remaining funds could be used (by a transfer lump sum death benefit option) to provide a dependants’ pension. If there were no dependants, then the funds could be paid to charity, or transferred to the pension funds of other members in the same scheme, or in limited circumstances, be repaid to the employer with a tax charge. There was an inheritance tax charge on ASP funds remaining on the member’s death, which applied to any funds not paid as pension benefits to a dependant or to charity.
What are the changes?
The provisions on members’ and dependants’ ASPs are tightened up. There will be a requirement to draw a minimum income from a member’s or dependant’s ASP fund. A higher maximum annual withdrawal from an ASP fund has also been introduced. A tax charge is introduced where ASP funds remaining on the death of a member or a dependant of a member are transferred to the pension funds of other members in the same scheme.
- there will be a minimum income requirement of 55 per cent of the annual amount of a comparable annuity (for a 75 year old). Failure to comply with this requirement will mean that the scheme administrator will become liable to a 40 per cent tax charge on the difference between the minimum income limit and the amount paid as pension income in that year;
- the maximum annual withdrawal of income that will be permitted from an ASP fund will be 90 per cent of the annual amount of a comparable annuity (for a 75 year old);
- there will no longer be a transfer lump sum death benefit option. Therefore, an unauthorised payment charge of up to 70 per cent will be imposed where on the death of a member or on the death of a dependant of a member any remaining ASP funds are transferred to the pension funds of other members of the scheme;
- the changes will have effect on and after 6 April 2007. The unauthorised payment charges on the death of the ASP member will only have effect where the member or dependant dies on or after 6 April 2007;
- associated changes will be made to the ASP provisions in the Inheritance Act 1984 (IHTA) arising from the unauthorised payments pension charges on ASP funds. For deaths on or after 6 April 2007, inheritance tax (IHT) will be calculated on the basis that the IHT nil rate band will be set in priority against the estate of the member excluding ASP funds;
- some pension schemes have been unable to trace members who have attained age 75, to pay their benefits. The Finance Bill will include a provision that if a scheme has taken reasonable steps to trace a member, then the funds will, on the missing member’s 75th birthday, become held "in suspense", and will not become ASP funds. Where a member is subsequently traced, he will have the choice which was available at age 75, to take an annuity or an ASP.
Changes to tax relief on personal term assurance
Term assurance policies are life insurance policies that only pay benefits on the death or critical illness of an insured person. As part of pension tax simplification at 6 April 2006, a term assurance policy could be sold with tax relief so long as it terminated before the insured’s 75th birthday. The insured person received tax relief on contributions under the scheme that was used to pay for the term assurance policy.
The change which will be introduced in the Finance Bill 2007 will mean that individuals will no longer get tax relief on pension contributions that are used to pay premiums under personal term assurance policies.
The Finance Bill will also provide new powers to pass secondary legislation to enable the Government to act quickly to remove relief from any new products sold with a view to avoiding these new restrictions on tax relief.
Various changes have been made, effective from 6 April 2007, which are mainly designed to ensure that the pensions tax rules continue to meet the original intentions of the simplified regime. These are, in brief:
- individuals who have rights to an enhanced lifetime allowance will find it easier to make transfers between pension schemes without losing those rights;
- ill health pensions may now be reduced at the discretion of the scheme administrator;
- pension commencement lump sums - a technical amendment which allows a pension commencement lump sum to be paid in certain circumstances after a member attains age 75;
- a payment of lump sum death benefit may be made within two years of the date of notification, rather than within two years of the member’s death. This timing will be mirrored for IHT, so that the scheme funds will not attract IHT;
- unsecured pension fund - a review of the annual maximum withdrawal from an unsecured pension fund may be permitted more frequently than every five years;
- winding up lump sums - an administrative amendment has been made to help speed up scheme wind-up;
- establishment of pension schemes - instead of having to belong to one of a number of categories set out in current legislation (bank, insurance companies etc.) a person will now need permission from the Financial Services Authority (FSA) in order to establish a (non occupational) registered scheme;
- a change to the pension tax rules on property held by an investment-regulated pension scheme where it holds property indirectly through a UK REIT;
- certain non cash benefits for retired former employees may be provided, which will be exempt from tax, similar to those received by employees;
- an anti-avoidance change which will prevent unauthorised employer payments being structured to reduce the overall tax charge.
Extension to the Financial Assistance Scheme
The Government has announced an extension to the Financial Assistance Scheme (FAS) - from £2.3 billion to £8 billion. This is the second extension to the FAS’s budget since it was set up in 2004. The increase means that all of the 125,000 people who lost their final salary pensions when their employers became insolvent will get 80 per cent of their "core pension", up to a cap of £26,000 per year. The "core pension", as described by the chancellor, will not include indexation, the ability to withdraw lump sums at retirement or lump sums for death within five years of retirement.
FAS will also drop the limitation of compensation to those entitled to receive more than £10 per week.