Pension Schemes Newsletter 38
Well how about that? A Christmas present from the lovely people at the HMRC.
Those of you who, like me, are collecting the set will be delighted to know that HMRC Newsletter 38 has just been issued. This provides detail on how the change in the normal minimum pension age from 50 to 55 on 6 April 2010 will affect pension schemes. It sets out how the change will affect pensions and pension commencement lump sums and how those who reach 50 between the Easter holiday dates of 2 April 2010 to 5 April 2010 inclusive will be affected.
We’ve copied and pasted the whole thing here for you in this BeeLine with links and everything, but if you want to get to the real thing on the HMRC website too don’t despair; there’s a link here that’ll transport you right to it using the magic of the internet.
Anyway, get yourself a cup of tea and a biscuit and get your reading glasses on - the full SP is below.
17 December 2009
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
Pension Schemes Newsletter 38
16 December 2009
Change in normal minimum pension age from 6 April 2010
• Outline of change
• Pension commencement lump sums
• What is the pension payment date?
• What about those who are 50 on 2 April 2010 to 5 April 2010 inclusive?
It is widely appreciated that from its introduction in July 2004 the tax legislation in FA 2004 for registered pension schemes has contained provision to increase the normal minimum pension age from 50 to 55 from 6 April 2010. Our published guidance in RPSM has long reflected this, for example in pages RPSM08100030 and RPSM03106020. Schemes and advisers have had over 5 years to consider, anticipate and advise on its impact.
We have been asked to confirm our interpretation of the rules for payment of pension commencement lump sums and pension benefits around 6 April 2010 and about some of the practical aspects of the change. This newsletter addresses those requests.
Outline of change
The normal minimum pension age (NMPA) marks the earliest age at which pensions and lump sums may normally be taken as authorised payments under a registered pension scheme. The current NMPA of 50 rises to 55 from 6 April 2010.
From 6 April 2010, benefits in payment to a member under the NMPA of 55 are likely to be unauthorised payments, unless
• the member has a protected pension age, (see RPSM03106000),
• the NMPA requirement does not apply because the member takes benefits on ill-health (see ill health), or
• the member started taking those benefits before 6 April 2010 having reached the NMPA of 50.
The NMPA requirement constitutes one of the conditions to be met if a payment of pension is to qualify under the tax rules as an authorised member payment. This requirement is applied through ‘pension rule 1’ in s165 (1) FA 2004 which provides that “No payment of pension may be made before the day on which the member reaches normal minimum pension age”.
To determine which NMPA is to apply to the later payments HMRC looks at the point at which
• in the case of income withdrawal, sums or assets are designated as available for the payment of unsecured pension, or
• in the case of any other type of pension, the member first has an actual (as opposed to prospective) right to the payment of a pension.
That point is described in RPSM11102050 as the date on which a benefit crystallisation event (BCE) occurs in relation to that pension. It is not necessarily the same as the date the first pension instalment is paid over. In effect we are saying that the NMPA is frozen for that specific pension according to which NMPA prevails at the time the pension entitlement arises i.e. the date of the BCE.
One consequence of having the pension entitlement (BCE) date freeze the NMPA for a specific pension, is that so long as the pensioner was at or over the prevailing NMPA at the time the pension entitlement arose (BCE date), it makes no difference if the pension does not actually start to be paid until after the date of the change in NMPA (for example where the pension is paid in arrears). In these circumstances the pension payments will still be authorised payments even though the member has not reached NMPA of 55.
There is more detail later in this newsletter about pension payment dates and circumstances where the first payment might be made at a date later than the date of entitlement.
Pension Commencement Lump Sum
Paragraph 1(1)(aa) of Schedule 29 FA 2004, requires that in order for a lump sum to be a pension commencement lump sum (PCLS), the pension to which it is linked must be one of the authorised types of pension. In terms of NMPA, the requirement for a PCLS is expressed in the tax law as the member needing to have attained NMPA at the time of payment of the PCLS. Paragraph 1(1)(d) of Schedule 29 FA 2004 states the PCLS can only be “paid when the member has reached normal minimum pension age”.
The PCLS must be paid within the period starting 6 months before and ending 12 months after the day on which the member became entitled to it. The point of PCLS entitlement (BCE6) is in turn tied to the point in time immediately before the actual entitlement to the linked unsecured pension / scheme pension / lifetime annuity arises (BCE 1, 2 or 4). Ultimately then, it is the point of pension entitlement which sets the PCLS payment window and it is impossible (aside from certain cases of protection) to speak of the lump sum in isolation from the relevant pension to which it is linked. Accordingly we consider the same NMPA must apply to both the PCLS and the linked pension.
For a lump sum payment to be a PCLS the member must have reached the frozen NMPA at the earliest of the date of payment and date of entitlement. So in practice this means the NMPA requirement will be met at both dates.
In our view, when considered as a whole, the legislation has to be interpreted so that the basic principle is that, at the relevant benefit crystallisation event (BCE6 and BCE1,2 or 4), the test will be applied as to whether the member is at or over the NMPA prevailing at that point. This test determines whether the relevant pension and lump sum (PCLS) benefits are authorised or not.
RPSM08100030 confirms two things:
1. Where a member starts to take benefits after reaching the NMPA of 50 before 6 April 2010 but they are not yet age 55 by 6 April 2010 those benefits can still continue to be paid after 6 April 2010 as authorised payments.
2. If the member wishes to crystallise further benefits after 5 April 2010, for these to be authorised payments the member must have reached the NMPA of 55.
A member’s 51st birthday is in August 2009. Their pension starts in December 2009, i.e. when they are aged 51 and so above the prevailing NMPA of 50. When the NMPA changes on 6th April 2010 and NMPA goes up to 55, the pensioner is still only 51. Even though their age is then below the prevailing NMPA of 55, that particular pension continues undisturbed as an authorised payment.
If the member were to start another pension on or after 6th April 2010 then in order to receive it as an authorised payment they must wait until they are 55, in August 2013, to take that further pension (unless one of the protected pension age or ill health exceptions applies).
Pension Commencement Lump Sums
As stated above the tax rules allow for both:
• pre-payment of the lump sum up to 6 months before the PCLS entitlement actually arises (BCE6) (but see below for when this period may shorten), and
• post-payment, where the lump sum may be paid up to 12 months after the PCLS entitlement actually arises (BCE6) (the 12 month period never shortens).
Also the NMPA must have been reached at the time of payment, but see example 6 which explains an exception.
Some examples of the relevant NMPA that applies are set out below.
A person whose PCLS entitlement (BCE 6) occurs in February 2010 when the NMPA is 50, has the prevailing NMPA requirement for the purposes of the payment of that PCLS fixed at 50, i.e. they must be over 50 when it is paid: say in July 2010.
A person whose PCLS entitlement (BCE6) occurs after 5th April 2010, say in May 2010 when the NMPA is 55, will have to be over 55 when a post-paid PCLS is paid: say in July 2010.
As you need to have reached NMPA, 50/55, at the point of actual payment of PCLS, if you intend to take benefits on or shortly after 50/55th birthday the 6 months pre-payment window can be either shortened or is not available at all.
Suppose a person who was 50 on 6th November 2009 has a PCLS entitlement (BCE6) occur on 5th February 2010 i.e., when the NMPA is 50. Their NMPA for the purposes of the payment of that PCLS will then be fixed at 50. As they must be over 50 when the payment is made the pre-payment window is effectively shortened to 3 months (the period from age 50 to the BCE 6 date).
Care may be needed if the ‘PCLS’ is pre-paid within the 6 months before 5 April 2010. As a pre-payment it follows that, at the point of payment, you cannot be sure when the entitlement (BCE 6 date) will actually arise, so it would be impossible to know for sure at the time the PCLS is paid, which NMPA will ultimately apply.
Suppose say on the 4th February 2010 a person aged 52 is paid a lump sum, which is intended to be a PCLS before 6th April 2010, but doesn’t actually become entitled to the linked pension until after 5th April 2010, say on 18th May 2010. That pension will not be authorised since they will be under the prevailing NMPA of 55 on 18th May 2010. A PCLS must be linked to a ‘relevant pension’ - an unauthorised pension will not suffice. This means that the lump sum will also be unauthorised, even though it was paid at a time when the member was past the prevailing NMPA. To make the lump sum authorised as a PCLS in this example, the member would need to have become entitled to the corresponding pension before 6th April 2010.
Suppose a person aged 54 is paid a lump sum before 6th April 2010, which is intended to be a PCLS, say on the 20th November 2009, but doesn’t actually become entitled to their pension until after 5th April 2010, say on their 55th birthday, 10th May 2010. That pension will be authorised since they will satisfy the prevailing NMPA of 55 on 10th May 2010. This also means the BCE6 date is 10 May 2010 so the applicable NMPA is 55. Strictly this means that the lump sum will be unauthorised, even though it was paid at a time when the member was past the prevailing NMPA. It is clear it is not the intention to deny the PCLS 6 month pre-payment facility to those transitional cases who reach age 55 shortly after 6 April 2010 but had met the prevailing NMPA at the time of payment so in these very limited circumstances we will accept that the lump sum is a PCLS paid at a time when the member had attained the applicable NMPA.
What is the pension payment date?
As stated above, the point of entitlement is when the member first has an actual (as opposed to prospective) right to the payment of the pension or, in the case of income withdrawal, when sums or assets are designated for unsecured pension. This point of entitlement is the date on which a benefit crystallisation event (BCE) occurs and is not necessarily the same as the date the first pension instalment is paid over.
An ‘actual right’ is when a member has the right to a benefit without having to fulfil any further conditions or take any further actions, e.g. having to agree to or authorise the payment of a benefit, or having to obtain an employer’s or scheme trustee / scheme administrator’s agreement or co-operation to benefit payment.
Although the term ‘actual right’ refers to the receipt of real benefit, rather than merely being in possession of a right to obtain it, it does not necessarily refer to the date a benefit is actually paid out.
RPSM11102050 sets out the different scenarios about entitlement and payment for the different pension categories, unsecured pension, scheme pension, lifetime annuity. Put briefly;
Unsecured Pension - entitlement to an unsecured pension specifically arises whenever all or part of the sums and assets within a money purchase arrangement are designated to be available to pay an unsecured pension. However, because there is no minimum income requirement, the first income payment might not actually be drawn until some years later. See also RPSM11102050 example 5.
• Actual right - say a pension scheme’s rules state that pension benefits will come into payment on the member’s 65th birthday. This should happen automatically if the member has notified the scheme of the option they wish to exercise and has confirmed all the necessary information, for example bank details, to put the pension into payment. However if the scheme experiences internal administrative delays and does not pay any benefits until say 2 months after the 65th birthday the member still has an actual right to the payment of benefits on their 65th birthday, so benefit entitlement arises on their 65th birthday not the actual benefit payment date. See also RPSM11102050 examples 1 and 3.
• Prospective right - say the pension scheme rules provide that a member may receive benefits from age 55 onwards and that benefits must come into payment by age 75. Although any member who has reached age 55 is eligible to take benefits from the scheme their rights are only prospective until they actually opt to take benefits. Until then, they do not have any benefit entitlement. See also RPSM11102050 example 2.
Lifetime Annuity – where a member opts to receive a lifetime annuity, from an insurance company of their choice that does not underwrite the benefits in their pension scheme, until the purchase price is passed to the insurance company there can be no certainty that the annuity will be secured at a given rate, so the rights remain prospective. Actual entitlement occurs when the insurance company accepts payment of the consideration and is bound to pay out the annuity from whatever is the start date under the terms of the contract. The date on which payment was effectively made for the purchase of the annuity, becomes the date of ‘actual entitlement’. The fact that the annuity itself might be paid in arrears does not affect the actual entitlement date. See also RPSM11102050 example 4.
Schemes and advisers have had over 5 years to consider, anticipate and advise on this NMPA change so we expect scheme administrators to have plans and processes in place, for example, to provide contribution cut-off dates, sell assets, undertake member arrangement valuations, etc., sufficiently early that they can meet the need to pay lump sums and contract for the lifetime annuity by 5 April 2010 for those under 55.
What about those who are 50 on 2 April 2010 to 5 April 2010 inclusive
Friday 2 April 2010 is Good Friday and therefore a Bank Holiday. Monday 5 April 2010 is also a Bank Holiday. Therefore the last day for most banking operations prior to 6 April 2010 is Thursday 1 April 2010. This may present difficulties for some members who will reach age 50 on any day from 2 April 2010 to 5 April 2010 inclusive. It is possible for a BCE to arise on these days, for example in relation to a scheme pension, but in many cases this will not be possible. It is clearly not the intention to deny those who reach age 50 on these four days the ability to access their benefits if they wish to. For these people we will accept that if the BCE 1/2/4 (and related BCE6) occurs on 6 April 2010 we will treat it as occurring on their actual 50th Birthday (2 April, 3 April, 4 April or 5 April 2010). So their pension entitlement arises when NMPA is 50 and any PCLS can be paid out over the following 12 months. There cannot be any pre-payment period for the PCLS in these cases as the BCE6 arises on their 50th birthday.
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