Revenue notifies changes to A-Day tax rules
OK, a bit of a bombshell this one! You’ll remember that when the Finance Act 2004 was enacted last year we were told there would be no changes made to the pension bits by the Finance Act 2005. The idea was to give us plenty of time in a stable environment to implement the A-Day changes and make sure individuals and schemes would have time to get things right. As you know, all that changed when the Chancellor announced in his pre-budget report that changes to the pension stuff would be made in the 2005 Finance Act after all. Unhelpfully, I think, no details were given at that stage about what changes were proposed and that, of course, has led to loads of speculation.
Well, the Inland Revenue slipped a document on their website yesterday outlining what these changes will be. It is a difficult document to read, is fairly vague and will obviously need to be followed by a fair bit of detail when the Finance Bill is published after the budget this year, but it gives us a good idea of what is likely to change. It also indicates what is not likely to change too, so that’s helpful. One of the first things I looked for was to see if there were any proposals to change anything to do with residential property being held as investments in Self-Invested Personal Pensions (SIPPs). As far as I can tell there were not, so that looks like good news for a start.
The document itself, which is headed up ‘Technical note – pensions simplification’ is eight pages long and outlines 49 separate areas where changes are going to be made to the 2004 Finance Act. That’s quite a lot, actually, and I couldn’t summarise all of that here quickly enough to get this out to you tonight. However, loads of it will affect the way insurers and pension providers will be operating pensions after A-Day and I can cover that off in future BeeLines. In this one I’ll concentrate on the smaller number of things that jumped off the page to us which I think will be of immediate interest to IFAs.
The document itself is split up into four main categories as follows:
- Benefits and contributions
- Lifetime Allowance
- Unauthorised payments
- Transitional issues
In the section on unauthorised payments (part F) the document states “There will be new rules to counter the use of intra-scheme reallocations of funds or accrued benefits for the purposes of tax avoidance.” Now, I’m not claiming to know what that means, and we’ve had no confirmation from the Revenue, but to me that sounds like the so-called Family SIPPs are going to get knocked on the head.
In the Lifetime Allowance section there are a couple of points that advisers need to be up to speed on right away. In part G of that section, entitled ‘Prevention of a second lump-sum’, the Revenue is (as expected) proposing putting an end to so-called ‘double dipping’. There will be rules to ensure that people who take a lump sum before A-Day, but defer taking pension do not get additional tax-free cash after A-Day too.
Also, under point O, it looks like they are saying that rules will be put in place to stop people who are, say, pre 1987 members of Executive Pension Plans, from taking 100% tax-free cash before A-Day and effectively wiping the slate clean for accrual of future benefits after A-Day.
Interestingly too, there are new proposals that all existing Income Drawdown cases on A-Day will be re-classified as ‘Unsecured Income’ cases and will have to be valued at that date to determine the maximum amount of income that can be drawn. Unsecured Income is the post A-Day term for what we now call Income Drawdown and I’ve written about it before. You can re-read that if you like by clicking here. It seems that we are to be given two years’ grace after A-Day to get this sorted out for people. Hopefully what it will mean in practice will soon be made clear to us.
Another biggy is that the so-called 50-member rule is going to be removed. You will remember the 2004 Finance Act requires schemes with fewer than 50 members to secure pensions by purchasing annuities rather than allowing them to pay pensions directly from their funds. Well, the Revenue appears to have listened to the arguments that this will cause problems for some smaller final-salary schemes and the rule is going out of the window. Worryingly, though, this announcement comes with some small print that to my eye may not look too good for Small Self-Administered Schemes (SSASs). It mentions that member protection in such small schemes that take advantage of this relaxation will be dealt with by DWP regulations (yet to be published) on scheme funding and the Pension Protection Fund. I have no idea what these regulations will say, but there must be a chance that the relaxation will come with more stringent funding requirements or something. Again, I suppose we will all be waiting patiently now for the Finance Bill to see just what this is all about.
Anyone who wants to get a hold of the technical note from the Revenue website can do so by following this link:
Inland Revenue - Technical Note on Pensions Simplification
I’ll leave it at that for now and come back with more detail on what the Revenue seem to be saying here as soon as we’ve had a chance to think about it some more and perhaps talk to them about it next week. I know I’ve been bombarding you with BeeLines over the last few weeks, I’m sorry about that, but it’s getting a bit like the Alamo here lately. This stuff’s coming in from everywhere all at once! Still, boring it isn’t…
17 February 2005
This document is based on Scottish Life's current understanding of the Finance Act 2004 and the document ‘Technical note – pensions simplification’ published by the Inland Revenue on 16 February 2005. This may be affected by future changes in legislation and the individual circumstances of the investor. Independent advice must be sought regarding the effect on a specific individual or scheme.