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
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 membersí 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 employerís contributions, as long as the benefit limits are not exceeded, but membersí contributions are limited to 15% of remuneration.† Under Chapter IV approval the total contributions are limited to an age related scale from 17Ĺ% 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 memberís 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 membersí 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 memberís remuneration plus the return on the memberís own contributions with interest plus dependantsí pensions in the case of each dependant up to 2/3rds of the memberís potential pension at normal retirement date.
after A-Day† The tax free lump sum may be any amount up to the memberís 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.
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 1Ĺ times final remuneration after 10 years, accrual at a rate of 3/80ths (with uplifted 80ths) for each year of pensionable service and 2Ĺ times initial pension before commutation.
after A-Day† Up to 25% of the memberís fund may be paid as a tax free lump sum.† The membersí 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.
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 dependantsí pensions equal to the memberís pension, in contrast with the fixed 10:1 factor used to calculate contributions).† Any excess of the memberís fund (money purchase) or the value of the memberís 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 memberís 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?
dependentsí benefits on death after retirement
IR limits† These are limited to a dependantís pension of 2/3rds of the membersí benefits and no lump sum except the balance of the first five yearsí pension if the member dies in that period.
after A-Day† If the memberís 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 dependantsí pensions paid out of the fund.† If the memberís pension has been secured and the member is under 75 at death, there may be either a lump sum less 35% tax or dependantsí 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 membersí 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 2Ĺ% 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 schemeís 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† Trusteesí 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 membersí benefits where tax charges are payable.
Members should be notified of changes and membersí 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
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