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Pensions Tax Simplification Newsletter No 1 June 2005

Contents

Welcome

Welcome to the first of our regular Pensions Tax Simplification Newsletters which will keep you informed on what you need to know in the run up to the launch of pensions tax simplification.

These Newsletters will be written with all our customers in mind. These include

  • individuals who want to find out how their pension contributions will be tax relieved and how their pensions will be taxed,
  • employers who may be setting up a pension scheme or making employer contributions on behalf of their employees, and
  • everyone in the pensions industry, including financial advisors.

They will provide articles of current interest (Hot Topics) and tell you about things you may need to do now to ensure that you are ready for the changes that will take place in April 2006. They will also answer some of the questions you have raised and flag up important dates to look out for.

Please let us know what you think about our Newsletter and whether there is any subject in particular that you would like us to include in future publications. Please see Contact Us for our contact details.

About Pensions Tax Simplification

What is Pensions Tax Simplification?

This is a new pensions tax regime to replace the numerous existing regimes, which currently cause considerable confusion for pension savers, employers and pension providers alike.

The new regime has a single set of rules for tax privileged pension saving. It will improve choice and flexibility for pension providers, employers and individual pension savers, further encourage individuals to save for retirement, and reduce administration and compliance costs for the pensions industry and pension scheme sponsors.

When does it start?

The new rules will start on 6 April 2006 – sometimes referred to as “A-Day”.

Key features of the new system

  • There is no limit on the amount of pension saving an individual can build up in a registered pension scheme. There will be two key controls - a lifetime allowance and an annual allowance.
  • A single lifetime allowance (LTA) against which an individual's pension savings will be tested when they take their benefits (or at age 75 if the benefits are not in payment at that age). This will be £1.5m on 6 April 2006, rising to £1.8m by 2010/11 and reviewed thereafter. A lifetime allowance charge of 25% will be made on pension funds in excess of the LTA where the excess is taken as a pension. The LTA charge will be 55% where the excess is taken as a lump sum.
  • An annual allowance (AA) on the increase in the pension savings in a tax year. This will be £215,000 on 6 April 2006 rising to £255,000 by 2010/11 and reviewed thereafter. There will be annual allowance charge of 40% on increases in pension savings in excess of the annual allowance.
  • Tax relief for individuals of up to 100% of earnings or £3,600 each year.
  • Individuals will be able to claim Protection of pre-A-Day rights from the lifetime allowance charge and to protect their lump sum rights by registering a claim with HMRC by 6 April 2009.
  • A single set of rules on pensions in payment – allowing scheme members to take a tax-free lump sum of as much as 25% of their pension fund up to the value of the lifetime allowance, subject to the rules of their scheme.
  • Flexible retirement – allowing those people in occupational pension schemes, where the scheme rules allow it, to continue working whilst drawing retirement benefits.
  • Raising the minimum pension age from 50 to 55 years by 2010.
  • From age 75 there are some further limits on the form of benefits that may be taken – e.g. no tax free lump sums can be taken in connection with any pension benefits which commence after that age.

Key Benefits

  • There will be greater individual choice and flexibility in when and how people save for their retirement, allowing people to pay more towards a pension and retirement lump sum and still gain the benefits of tax privileged savings. The new rules will allow everyone to pay what they can afford when they can afford it.
  • A simpler and more accessible environment for pensions saving – this will make it easier for individuals to plan with confidence for a comfortable retirement
  • Transparency, clarity and a reduction in the administrative burden for pension schemes, their members, operators and sponsors – including employers – and financial advisers, removing much of the complexity, need for specialist advice and cost that currently hinders retirement provision.
  • Tax rules will no longer be a barrier to scheme design – pension providers will be able to offer more flexible products which better reflect the needs of pension savers.

Who will benefit?

Individuals – through greater choice and flexibility in when and how they save for their retirement, being able to pay more towards their retirement if they wish. Individuals will be able to save in more than one pension scheme at the same time, for example a personal pension and an occupational pension. Many people will benefit from a larger lump sum on retirement.

Pension Industry – through reduced administration costs, improved customer service and a reduction in the current burden caused by expensive administrative checks. The removal of the multiple tax regimes will give them the opportunity to rationalise their portfolios into a small number of more flexible products, and will stimulate new and innovative product design.

Employers – through lower administration costs and, more importantly, the de-regulation of tax rules that will enable them to design pension schemes that best fit their business needs.

Hot Topics

IT and Data Cleanse

We are developing a new IT system to deliver an on-line service for tax registered pension schemes from 6 April 2006. Any pension scheme wishing to register with HMRC for tax relief and exemptions, will need to do so via the new on-line service, the ‘Pension Schemes Service ’ and all registered pension schemes will be required to file pension tax forms and information on line as well as make payments electronically Existing tax approved pension schemes will be deemed to be registered pension schemes from 6 April 2006 – unless the pension scheme opts out of the new regime. This article explains how we plan to handle the migration of existing tax approved schemes to the new IT system.

Our new IT database will need to hold the same information for both new schemes registering from A-Day and existing tax approved pension schemes. The data we will need to hold on the database is:

  • Details of the scheme administrator
  • Details of who established the scheme
  • The pension scheme name
  • The legal structure of the pension scheme
  • The number of members in the scheme in bands
  • Whether or not the scheme has a member with the ability to control the use of scheme assets.

This information is being kept to the minimum needed for efficient administration of schemes in the new regime and to support our compliance risk assessment activity.

We have consulted in depth with the Pensions Industry about how a limited data cleanse exercise of our current records might best be carried out. We have decided to radically limit the information requested and to focus on supporting scheme administrators and practitioners with pre-registration for the on-line service. There are two stages – pre-registration at the Government Gateway and enrolment for the on-line service. Enrolment for the on-line service can only be carried out by the Administrator/practitioner once the new system goes live.

We will be asking in the main self-administered schemes to provide HMRC with details of the scheme administrator(s). This information will be used to pre-register them with the government gateway. It will also be captured on our new database along with the relevant existing information we hold. We would then like the scheme administrator to check the details held when the new on-line service goes live in April 2006. We will also ask if the scheme administrator would like to authorise HMRC to deal with a practitioner on their behalf. If so then that practitioner would then be able to view the information on the on-line service and amend it if necessary on the scheme administrator’s behalf.

In other cases we will not be requesting information from schemes, for example insured schemes, retirement annuity contracts, deferred annuity contracts and old code schemes. We will cut across the relevant information we hold and pick up the additional data after 6 April 2006 as and when the reports and returns are filed on line in accordance with the legislation.

To help avoid a bulge of pre-registrations for the new service in April/May 2006, we will be asking schemes likely to need to use the service soon after A-day to provide this information to us before December 2005. We are currently discussing with the Pensions Industry the detail of how the process for pre-registration will work and will provide an update on this in a future Newsletter.

Role of the scheme administrator

Many of you have asked us for further information on the role of the scheme administrator given the responsibilities that fall to them in the pensions tax simplification world.

Who is the scheme administrator for new schemes registered from 6.4.06?

For new schemes which register after 6 April 2006 the scheme administrator is the person or persons who made a declaration under section 270 Finance Act 2004. The declaration means that you cannot fall into the role without being aware of your responsibilities. But these responsibilities will also apply to existing administrators of schemes approved on or before 5 April 2006 who already hold similar responsibilities.

Who is the scheme administrator for schemes approved prior to 6.4.06?

If at A Day you are the administrator of the scheme for an occupational pension scheme (as defined in S611AA ICTA) or the scheme administrator of a personal pension scheme (as defined in S638 ICTA) then you will be treated as the scheme administrator of the registered pension scheme after 6 April 2006. For trust based retirement annuity contracts the trustees at A Day will be the scheme administrator. For other retirement annuity contracts or deferred annuity contracts the insurance company involved will be the scheme administrator. It is important to understand that just carrying out administrative roles for a pension scheme will not mean you are the scheme administrator.

What responsibilities does the scheme administrator have?

The scheme administrator has responsibility for all tax charges, interest and penalties for a registered pension scheme in addition to being the person who is responsible for registering a new scheme. In fact, only the pension scheme administrator can register the scheme for tax purposes.

There can be a number of scheme administrators acting for a scheme but there must always be at least one in place. If that single scheme administrator no longer acts, for example the administrator dies, then there are provisions in the legislation for the liabilities to default to others (for example the sponsoring employer of an occupational pension scheme or the person who has overall control of the scheme). If a scheme does not have a scheme administrator then HMRC can remove the registered status of that scheme. For this reason, it is important that there is continuity in the role of scheme administrator.

The scheme administrator is responsible for filing the Event Reports, Pension Scheme Return and Accounting for Tax forms. A practitioner can file these on behalf of the scheme administrator but the scheme administrator must approve the content and authorise the submission of the return/report.

It will be possible to authorise HMRC to deal with different practitioners for different functions. For example a scheme administrator may want HMRC to deal with one practitioner in relation to the accounting for tax return and event report but a different one for the pension scheme return. We will only correspond with the practitioner about these returns if we have received the appropriate authorisation from the scheme administrator, otherwise we will correspond with the scheme administrator.

Timeline to A-Day

Simplification Forms

In April 2005 we published drafts of some of the main Simplification forms on our website to give you an idea of the information that we will require from registered pension schemes and others from April 2006 – see Pension Schemes:Tax Simplification-Draft Forms to view these. We plan to publish drafts of the remaining forms with completion notes in October 2005.

Legislation

Finance Act 2004 and Finance Act 2005 contain the legislation for the new simplified regime for the taxation of pensions. These include regulation making powers and we are publishing the regulations needed in draft on our website. – see Pensions Tax Simplification Draft Regulations to view those already published. We plan to have issued all the draft regulations we will need to give full effect to the Finance Act 2004 and Finance Act 2005 measures within the next month and to finalise the regulations by Autumn 2005.

Guidance

We have been working hard to ensure that we provide you with detailed guidance that supports the legislation in FA 2004 and FA 2005 during the course of this year. The guidance will be in a new manual available on the HMRC internet only, called the Registered Pension Schemes Manual (RPSM)

Unlike guidance on the current regime, this will be written from the perspective of the individual and employer as well as the pensions industry and be a fully on-line product.

We are currently incorporating the provisions of FA2005, and plan to publish the guidance follows:

  • June 2005 – The chapter on Protecting pension rights from tax charges has just been published. This section covers the rules for primary and enhanced protection, protecting lumps sum rights and the right to early payment of pensions.
  • July 2005 – Publication of a further 5 chapters by the end of July. These are
    • Member benefits – this describes the type of benefits a registered scheme can pay as “authorised payments”, when they can be paid and to whom.
    • Lifetime Allowance – this describes what the lifetime allowance is and when and how benefits should be tested against the lifetime allowance.
    • Registering a pension scheme with HMRC – this covers how a pension scheme can become a registered pension scheme
    • Pension Age – this describes the ages at which pension benefits can be paid
    • Transfers – this describes recognised transfers and non-recognised transfers and the tax consequences of each type
  • September 2005 – Publication of the remaining chapters by the end of September. These are
    • Death Benefits – this describes what benefits can be provided following the member’s death
    • Contributions – this covers what contributions can be paid by members and employers and what tax relief may be given
    • Annual Allowance – this covers what the annual allowance tax charge is and when a member will have to pay the tax
    • Taxation – this covers the taxation of scheme investments, authorised payments to members and employers and unauthorised payments.
    • Investments – this describes various methods of investing scheme funds and some of the consequences
    • International – this covers non-UK aspects of the new tax regime
    • Provision of Information – this describes what information needs to be reported between schemes, members and HMRC, and the consequences of providing incorrect or late information

Dates for Employers

HM Revenue and Customs run a series of Employer Talks throughout the country which cover a number of issues. We will be hosting a Pensions Stand where you can find out more information about pensions tax simplification and its benefits. If you would be interested in attending one of these please see Employer Talk for more details.

Contact us

If you have any questions about anything to do with tax rules for pensions and you cannot find the answer in the Registered Pension Schemes Manual, you can contact us by email, phone or write to us using the details found on our contact page.