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
return to list of other law articles