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More Complicated Explanations of Simplification
I know some of you like to keep up to date with this stuff, so I thought I'd let you know the tax guys have just put out the latest issue of their ever-popular Pension Tax Simplification Newsletter. This issue is number twenty-five in the series and is a corker.
The main article deals with clarification of the BCE3 test on scheme pensions that commenced before A-Day. The following is taken directly from that article and is a good demonstration of just how simple things have become in pensions these days:
There is currently a consultation exercise being undertaken by HMRC about the way that the tax rules on benefit crystallisation event 3 (BCE3) operate. The responses to the consultation, as made up to the closing date of 28 February 2007, are currently being considered. But within the exercise, there have been representations made seeking clarity about how HMRC will interpret the existing provisions for deciding whether an increase to a scheme pension, which started before 6 April 2006, will be within the permitted margin or trigger a BCE 3. The provisions are at paragraph 12 of Schedule 32 Finance Act 2004.
This newsletter item is to provide practitioners with some clarification, in response to those concerns, about what pension increases are to be regarded as being within the permitted margin.
The permitted margin is the notional measurement applied from the original date of entitlement to the scheme pension within which pension increases will not give rise to a BCE3. Normally, the permitted margin is the greater of 5% per year and the increase in the retail price index (RPI). But for scheme pensions which started before 6 April 2006, there is an additional measure as an alternative to the greater of 5% or RPI and it is described as P%. This relates to the increases that may be made each year under the scheme’s own provisions as they stood at 5 April 2006.
P per cent does not need to relate to a year-on-year percentage increase. Rather, the expression of a percentage exists as a common form of comparison with the other forms of increase. We are prepared therefore to accept that increases to a pre A Day scheme pension, whether the increases are made before, on or after 6 April 2006, which may be accepted as being within P per cent include the following if they are permitted within the scheme’s provisions as at 5 April 2006:
- an increase to reflect an adjustment to the level of pension in recognition of the revaluation of contracted-out rights, i.e. to a guaranteed minimum pension (GMP).
- an increase awarded by use of the discretion of the scheme administrator/trustees where such an increase is demonstrably in keeping with the power permitted within the scheme provisions.
- an increase which relates to an element of a pension, for example, a contracted-out element, which does not relate to another element, or where both elements are increased but at different rates.
All the above increases would be subject to the scheme provisions which limited the scheme pension to the pre A Day HMRC benefit limits. But where a pension was paid at the maximum level, or reached such a level following pension increases, it is likely that it could be further increased at the greater of 3% per year or the increase in the RPI, see RPSM11104400. Increases, even where made after 5 April 2006, which do not produce a pension level above the maximum plus 3%/RPI may be accepted as being within P%.
In summary, if it can be established that an increase to a scheme pension which started before 6 April 2006 would have been permitted within the scheme provisions as they stood at 5 April 2006, it may be regarded as being within P%. It would follow that such an increase would fall within the permitted margin, and does not give rise to a BCE3.
The above interpretation may be taken to apply for testing against the lifetime allowance from 6 April 2006. If a scheme administrator has produced a statement to the member showing a percentage of standard lifetime allowance which now transpires not have to have produced an amount crystallised, then the member should be informed that the statement is cancelled. If a lifetime allowance charge has arisen which now requires adjustment, an adjustment may be made under the normal accounting for tax procedure.
Now, if that's simple I reckon I've got something wrong with my dictionary and I may have to take it back to Smith's to have it updated next time I'm in there.
But if it meant anything to you, and I know it is probably important to some of you and will affect the advice you give, you can get to a downloadable version of the complete newsletter by clicking on the link here:
http://www.hmrc.gov.uk/pensionschemes/newsletter25.htm
There are other articles too on the Notional Earnings Cap for 2007-8, the Pension Scheme Self Assessment Tax Return and even the withdrawal of Statement of Practice 13/91. It just doesn't get any better than this does it? Be sure to make an extra large cup of Horlicks before you settle down by the hearth to read it though: you may be there some time!
6 March 2007
Source:
HMRC: Pensions Tax Simplification website - Newsletter No 25
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