Following consultation announced in the 2006 Pre-Budget Report, the Government has made some further helpful technical improvements to the tax simplification regime. The changes are backdated to 6 April 2006 (with the exception of a small change to the calculation of RPI, noted below).

  • The circumstances in which schemes are exempt from the lifetime allowance test applied on benefit crystallisation event 3 (BCE3) have been widened. The value of an individual's pension benefits are tested against the lifetime allowance (currently £1.6 million for 2007/08) on the occurrence of certain "benefit crystallisation events." BCE3 triggers a test where a pension in payment is increased by more than a permitted margin. The rationale behind BCE3 is to prevent an individual from taking a smaller scheme pension in the first year of payment, in order to avoid a lifetime allowance charge. The changes will mean that, where at least 20 pensioner members are paid the same increase at the same time, BCE3 will not apply. Previously, the legislation provided that all pensioner members must be paid the same increase in order for the exemption to apply.
  • Increases in pensions will be exempt from the BCE3 test provided they do not exceed a "normal rate of increase" in a 12 month period. The "normal rate" is the greater of 5% and RPI. Schemes must use the RPI figure published two months before the pension increase occurs (this change is not backdated to 6 April 2006; instead it took effect from 10 October 2007).
  • The Pre-Budget Report also simplifies the calculation of protected lump sum rights (that is, where members were entitled to tax free lump sums exceeding 25% of their pension rights pre-A Day). Schemes will no longer have to calculate whether relevant benefit accrual has taken place.
  • The definition of "investment regulated pension schemes" will be changed to ensure that it does not include schemes whose individual members could not realistically be expected to influence scheme decisions to invest in taxable property. Investment regulated pension schemes (for example, schemes which were SSASs and SIPPs pre-A Day) are subject to additional rules and regulations and there had been some concern that larger occupational pension schemes were caught inadvertently by the legislation.

Broadly, the Pre-Budget Report also extends the existing inheritance tax anti-avoidance measures to impose:

  • Unauthorised payment charges when the member surrenders rights to payments under a lifetime annuity or dependant's annuity; and
  • Unauthorised payment charges when the member dies and a connected person becomes entitled to an increase in their pension rights attributable to that death.

These changes will affect surrenders made on or after 10 October 2007 and for increases in pension rights attributable to the death of a member on or after 6 April 2008.