deeds and rules
after A-Day
by
Roderick Ramage, solicitor, www.law-office.co.uk
first
published (by distribution to professional contacts) on 6 February 2006
DISCLAIMER
This article is not advice to any person and may
not be taken as a definitive statement of the law in general or in any
particular case. The author does not accept any responsibility for anything
that any person does or does not do as a result of reading it.
|
Pension scheme trust deeds and rules and members’ booklets will need to
be altered to reflect the so-called tax simplification regime coming to
effect on 6 April 2006 (A-Day) and other changes in or affecting pensions law
made (mostly) by the Pensions Act 2004. The following note
(updated 10/03/06) contains no more than a summary of contributions and
benefits and their tax treatment and other changes in the law, which is
simplified and must not be relied upon as a comprehensive statement of the
law. It is made for the sole purpose
of drawing attention to key matters which will need to be considered by
employers and trustees. Each case must be
considered in light of its own provisions and needs and not on the basis of a
general review such as this. |
From A-Day (6 April 2006) the Revenue limits on contributions and
benefits and the earnings cap will cease to apply and be replaced by a lifetime
allowance £1.5m and an annual allowance £215k.
Were this to happen without more ado, any contribution rate and benefit
which is at present defined by a Revenue limit or the earnings cap might cease
to be limited. Therefore, by the
Finance Act 2004 Schedule 36 para 3, the Board of Inland Revenue may make
regulations to modify the rules of existing pension schemes to avoid this
consequence. The Pension Schemes
(Modification of Rules of Existing Schemes) Regulations 2006, SI 2006/364 will
come into force on 6 April 2006 and modify the rules of existing schemes so
that they will continue to operate as though the existing limits and earnings
cap remain in force for a transitional period until the end of the tax year
2010/1 or earlier if amendments to a scheme's rules take effect and state that
the modifications no longer apply in relation to it.
IR
limits Under Chapter I
approval, there is no limit on the employer’s contributions, as long as the
benefit limits are not exceeded, but members’ contributions are limited to 15%
of remuneration. Under Chapter IV
approval the total contributions are limited to an age related scale from 17½%
of remuneration up to age 35 to 40% from age 61. Both cases are subject to the earnings cap, at present £105,600
pa, so that no contributions may be paid in respect of earning above that
amount.
after
A-Day The whole of a
member’s remuneration up to the annual allowance may be paid as contributions,
and these may be paid by either the employer, the member or partly by one and
partly by the other. In the case of a
money purchase scheme, the contributions are the cash amounts actually paid,
but in the case of a salary related scheme the amount of the contributions is
an amount equal to 1/10th of the increased value of benefits earned
in the year.
decisions Will members’ contributions continue to be
restricted to 15%? Will they be
unlimited (subject to the annual allowance)?
Will they be limited to some other amount or percentage? Will total contributions (by employer and
members) be limited by an amount corresponding to the earnings cap, or some
other amount or (subject to the annual allowance) not at all?
death in service benefits
IR
limits This is limited
to 4 times the member’s remuneration plus the return on the member’s own contributions
with interest plus dependants’ pensions in the case of each dependant up to 2/3rds
of the member’s potential pension at normal retirement date.
after
A-Day The tax free lump
sum may be any amount up to the member’s lifetime allowance. Pensions for dependants may be provided
without limit but must be secured. The
definition of dependants is substantially unchanged.
decisions It is likely that for many members much
greater benefits may be provided than under IR limits, but the opposite may be
true for high paid employees. The only
decision is likely to be whether to increase the benefits and if so by how
much. As these benefits are usually
insured cost rather than the lifetime allowance may be deciding factor in many
cases.
retirement age
IR
limits The minimum
retirement age is 50.
after
A-Day The minimum
retirement age will be increased to 55 by 2010, but existing contractual rights
to retire at 50 will be protected.
decisions None unless the minimum age is to be
increased before 2010 or a higher minimum age is to be introduced.
tax free lump sum
IR
limits Depending on the
type and date of approval the tax free lump sum may be 1½ times final
remuneration after 10 years, accrual at a rate of 3/80ths (with
uplifted 80ths) for each year of pensionable service and 2½ times
initial pension before commutation.
after
A-Day Up to 25% of the
member’s fund may be paid as a tax free lump sum. The members’ fund may include AVCs, but is limited to the
lifetime allowance.
decisions Are existing limits or some other limits to
be applied? Or will the greater
flexibility of the new regime be allowed without restriction? Actuarial advice will be needed to compare
existing and new arrangements, particularly if an existing scheme gives both a
pension and lump sum as of right and increasing the lump sum would necessitate
reducing the pensions to avoid increasing costs.
pension benefits
IR
limits Under Chapter I
approval, the pension before commutation may not exceed 2/3rds of
final remuneration accrued under discretionary approval over not less than 20
years and over 40 years under mandatory approval. Under Chapter IV approval, there is no limit on the amount of the
pension.
after
A-Day There is no
restriction on the amount of pension, but the amount available to buy the
pension (in a money purchase scheme) or the capital value of the pension (in a
salary related scheme) may not exceed the lifetime allowance. In a salary related scheme the pension is
multiplied by 20 to obtain its capital value (NB this is the fixed statutory
factor of 20:1 on the assumption indexation of pensions in payment and
dependants’ pensions equal to the member’s pension, in contrast with the fixed
10:1 factor used to calculate contributions).
Any excess of the member’s fund (money purchase) or the value of the
member’s pension (salary related) over the lifetime allowance, will result in a
recovery charge (tax) of 25% of the excess.
What remains after the recovery charge may be taken as additional
pension, but if taken as a lump sum it will be taxed at the member’s PAYE rate,
making a total recovery charge for a higher rate tax payer of 55%.
decisions There is probably no need for any decision
in the case of money purchase scheme.
Are the existing rates of accrual in a salary related scheme to
remain? If not how are they to
accrue? Is the total pension to be
limited by (a) an accrual rate or (b) an earnings cap? If so are they to correspond to those under
the IR limits or some other level? Is
some other way of calculating pension to be adopted?
dependents’ benefits on death
after retirement
IR
limits These are limited
to a dependant’s pension of 2/3rds of the members’ benefits and no
lump sum except the balance of the first five years’ pension if the member dies
in that period.
after
A-Day If the member’s
pension is being paid out of the scheme (ie has not been secured), the whole of
the remaining fund can be paid as a lump sum less 35% tax or dependants’
pensions paid out of the fund. If the
member’s pension has been secured and the member is under 75 at death, there
may be either a lump sum less 35% tax or dependants’ pensions, but on death
after age 75 no lump sum may be paid.
decisions Are existing limits or some other limits to
be applied? Or will the greater
flexibility of the new regime be allowed without restriction?
civil
partnerships The statutory
rights of civil partners of pension scheme members override pension scheme
deeds and rules. If the latter are restrictive,
they may need to be changed (eg) to avoid discrimination against unmarried
heterosexual partners of members.
temporary
absence The present
restrictions on broken service may be relaxed.
If desired the trust deed and rules should be altered.
additional voluntary
contributions Pension schemes are no longer required to make AVCs
available. No alteration to the trust
deed and rules will be necessary unless the employer and trustees wish to
withdraw this facility, but an alteration will be needed if the existing 15%
limit on members’ contribution is to be relaxed and the limit is in the AVC
rule.
ill-health An incapacity pension may be paid (and not
be an unauthorised payment liable to additional tax) if the statutory
requirements are met. The trust deed
and rules should be altered to reflect these.
flexible
retirement Members will be
entitled to continue to work while taking all or part of their pensions. If desired the trust deed and rules should
be altered.
serious
ill-health Commutation of
GMPs is permitted and if desired the trust deed and rules should be altered.
indexation Pensions in payment in salary related schemes
continue to be increased by LPI, but the cap of 5% may be reduced to 2½% for
service after 5 April 2005.
member
nominated trustees There is
no longer an opt out from the statutory procedures and the number of MNTs is to
be increased to 50%. The statutory
provisions are overriding, but the trust deed and rules may need to be altered
if they are insufficiently wide to reflect the new requirements.
dispute
resolution The statutory
provisions will be overriding if and when brought into force, but the government
had decided not to implement them at present.
trustee
knowledge etc The statutory
provisions are overriding and it should not be necessary to reflect them in the
deed and rules.
consultation The new provisions for consultation about
changes in scheme deeds and rules do not need to be inserted into the scheme’s
trust deed and rules, but it might be good practice to refer to them in the
power of amendment.
family
friendly policies Statutory
rights during paternity and adoption leave override the trust deed and rules,
but the latter may need to be altered for consistency.
statutory
funding objective The SFO
will replace the MFR. It may be
desirable to alter the trust deed and rules to reflect the SFO particularly if
they are MFR based.
investment
principles The new
requirements for statements of investment principles are similar to the old but
(eg) will specify the intervals at which the statement must be reviewed. The
statutory provisions are overriding, but the trust deed and rules may need to
be altered if they are insufficiently wide to reflect the new requirements.
borrowing Trustees’ power to borrow is restricted and
any general power to borrow in the trust deed and rules will need to be
altered.
surplus
assets The necessity to
eliminate any excess surplus (over 105%) is abolished, and there are new rules
for the payment of surplus assets to the employer, which may need to be
reflected in the trust deed and rules.
winding
up A new statutory
order of priority overrides the trust deed and rules, but the latter should be
altered for consistency.
taxation It may be necessary to alter the trust deed and rules to ensure that the
trustees have power to deduct tax from members’ benefits where tax charges are
payable.
member
information
Members should be
notified of changes and members’ booklets will need to be revised and reissued
even if the employer and trustees decided not to alter the trust deed and rules
to reflect overriding changes.
copyright Roderick Ramage
click below to
return to list of pension law
articles