The Isle of Man Treasury is planning to remove the compulsory annuitisation of pension schemes, under its proposals for 'pensions simplification', because there are now fewer annuity providers on the island.
A consultation on the proposed changes was issued by the Treasury in October, and in its response to the responses, it states a Pensions Bill “will be introduced later this year and, subject to approval by the Branches of the Legislature, will be effective from April 2008”.
The 21-page document says the changes will be made to the existing Taxes Acts to modernise the system, and allow people more options in respect of pension provision than they have at the moment, while continuing to “facilitate the movement of people and their pension arrangements to the Isle of Man”.
Following the consultation process, which closed on 17 November, the Treasury says the key changes to the system will include:
- Introducing an annual limit for calculating the maximum amount of tax relief on pensions, instead of linking it directly to earnings – but not a lifetime limit;
- Breaking the link between net relevant earnings and pension schemes for low and non-earners to allow them to pay contributions into approved pension schemes up to an annual limit;
- To allow pension schemes to pay a 30% tax-free lump sum to members on retirement;
- To bring trivial commutation of pension funds into Manx law, instead of the current case-by-case judgements by the Assessor;
- To allow concurrency of membership of occupational and personal pension schemes;
- To increase the minimum age at which retirement benefits can be drawn to 55;
- To clarify the rules in respect of the investments by pension schemes which are permitted, and
- To remove the compulsion of schemes to purchase annuities in certain circumstances, and to introduce more flexibility in how benefits can be drawn at retirement.
The Isle of Man Treasury says one of the reasons for removing compulsory annuitisation for schemes is the reduced choice of annuity providers in the Island which means more members may need to obtain annuities from UK-based insurance companies.
As a result, it warns the annuity may be exposed to UK income tax which has “the twin problem of reducing the tax base in the Island and possibly exposing pensioners to higher rates of tax than they have at home, in circumstances where full double taxation relief for the UK tax paid can not be given”.
At the same time, the Treasury has published two draft Extra Statutory Concession orders which it plans to present to Tynwald shortly, outlining interim measures for trivial commutation and concurrency.
The triviality Concession order provides guidance on dealing with triviality cases, and allows for any number of trivial commutations to take place, provided the total pension benefits payable across all schemes and arrangements do not exceed £15,000 per individual.
However, the Treasury points out the order will be only an interim measure as the Pensions Bill is intended to provide statutory backing for triviality in the Isle of Man, while the concurrency order allows a member of an occupational scheme to also contribute to a personal pension arrangement.
The concession is, at the moment, drafted in line with current contribution limits - 15% of net relevant earnings - but the Treasury says it is intended to incorporate concurrency rules into the planned Pensions Bill, which will be based upon the new annual allowance.
The Isle of Man originally intended to overhaul its pension tax regime six years ago, as the initial changes were first put forward in draft legislation for the Income Tax (Retirement Benefit Schemes) Bill 2001.
At the same time, the Inland Revenue - now HM Revenue & Customs (HMRC) - revealed they were also planning a “major rewrite of the equivalent UK legislation”, which was scheduled to take place on 6 April 2004, so the Isle of Man agreed to defer their changes until the UK ones were in place.
But as A-Day was then postponed until 6 April 2006, the Isle of Man waited until “the full scope and potential of the UK changes was known” before restarting the legislative process.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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