In the first of a four-part series, Jonathan Crowther freelance consultant, clarifies the changes to the UK's pension regime
The UK's new 'simplified' pension regime kicked in from 6 April, 2006, the enabling legislation being largely enacted in FA2004.
HMRC has summarised the new regime as follows (my comments are in italics):
• The many existing sets of rules governing the taxation of pensions will be replaced with a single, uni- versal regime. This not quite true; (see below), there are now three regimes.
• For the first time, everyone will be able to save in more than one pension scheme at the same time. This is true. However, registered schemes must be treated as one scheme when applying the annual and lifetime allowances.
• There is no limit on the amount of money you can save in a pension scheme or the number of pension schemes you can save in - although there are some limits on the amount of tax relief you can get. This is true of unregistered schemes but not of registered schemes where the lifetime allowance applies.
• You will get tax relief on contributions up to 100% of your annual earnings (up to an annual allowance set at £215,000). So if you put £100 into your pension scheme, the tax relief the Government gives you on that is worth at least £28. This is true. But who can afford to lock up 100% of their annual earnings in a pension scheme?
• Even if you are not a taxpayer you can still get tax relief on pension contributions. You can put in up to £2,808 in any one tax year and the Government will top this up with another £792 - giving you total pension savings with tax relief of £3,600 per year. Following the Budget the Government now only contributes £720.
• A-Day will introduce flexible retirement, allowing people in occupational pension schemes to continue working while drawing their pension, where the scheme rules allow it. This is to be welcomed.
• If your scheme rules allow, you can take up to 25% of your pension fund as a tax-free lump sum. This applies to both registered and unregistered schemes but there is a monetary limit equal to 25% of the lifetime allowance.
• If your pension pot is more than the "lifetime allowance" when you come to take your pension you may be subject to a tax charge at that time. But this will only apply if your total pension savings are in excess of £1.5m from 6 April, 2006 (rising to £1.8m by 2010/11 and reviewed thereafter). The tax charge could be 55%.
• Those individuals with larger pension pots at A-Day will be able to protect their funds from the lifetime allowance charge by completing and submitting the appropriate form to HMRC. They have three years from A-Day to do this. Failure to meet this deadline could be very expensive.
• The rules on when you can take your pension will change. From 6 April, 2010, you will not be able to take a pension before you are 55. There are a couple of exceptions: you will still be able to retire early due to poor health, and if you have the right to retire before 50 at 6 April, 2006, that right may be protected. This only applies to registered schemes. There is no minimum retirement age for unregistered schemes.
There is not a 'single, universal regime' as HMRC says but three types of pension scheme:
• a Registered Pension Scheme (RPS);
• an ICTA 1988 s.615(3) Scheme (Qualifying Overseas Scheme);
• an Employer Financed Pension Only Scheme (EFPOS) and an Employer Funded Retirement Benefits Scheme (EFRBS), referred to as 'unregistered schemes'.
While an RPS is the privileged pension regime, the rules governing an RPS are far from simple and getting them wrong can incur serious tax charges of up to 55% on unauthorised payments and potentially 40% on the whole fund if it is de-registered.
An RPS requires a scheme administrator who is responsible for a number of things including (crucially) tax charges. The scheme administrator of an RPS may become liable for payment where a charge to income tax has arisen in respect of:
• Short Service Refund Lump Sum payments
• Special Lump Sum Death Benefits Charges
• Authorised Surplus Payments Charges
• Lifetime Allowance Charges
• De-registration Charges
The rules governing the administra- tion of an RPS are complex and involve filing a large number of returns with HMRC, some of which are required quarterly. As a result the employer company will normally act as scheme administrator and delegate many of the filing responsibilities to an authorised practitioner while remaining responsible for the content of the returns and liable to any tax charges. An RPS requires audit by a qualified auditor.
The compliance regime for unregistered schemes on the other hand is a 'light touch' and no specific qualification is required to administer an unregistered scheme. All reporting can be done through the SA900 annual self assessment trust return (which must be filed electronically by 31 January or by hard copy by 31 October following 5 April).
Unregistered schemes are simple to administer and not subject to any sort of penalty tax regime. Indeed they are essentially the only retirement benefit vehicles available where:
•the Annual Allowance (£215,000 for 2006/07) and Lifetime Allowance (£1.5m for 2006/07) limits are likely to be exceeded;
•there is a requirement to invest in residential property and/or chattels such as works of art or fine wines;
•the individual has not been resident in the UK in one of the preceding five years and
•retirement is anticipated before age 55 after 2010.
The majority view at the moment appears to be that unregistered schemes are not attractive and, unlike FURBS, will not be used to any great extent because of their unfavourable tax treatment compared to an RPS. However there is a growing minority view that they are very attractive schemes.
While an onshore unregistered scheme would be subject to income tax and capital gains tax in the same way as on onshore trust, an offshore unregistered scheme would only be subject to income tax on its UK source income. Whereas contributions to an RPS are deductible for the employer when made, they are only deductible when retirement benefits are paid out by unregistered schemes. Nevertheless there is a deferred deduction available to the employer. But contributions to unregistered schemes are not taxable on the employee or subject to NIC until paid out. A model can be built comparing the economic costs of a contribution to unregistered schemes with a direct bonus payment which, when coupled with tax-free roll up offshore and no employer NIC being payable when benefits are paid, demonstrates a significant economic benefit for both employer and employee in using an unregistered scheme over a direct bonus payment.
Benefits deriving from contributions by employees to unregistered schemes are tax-free although the employee receives no tax deduction on the contribution. Nevertheless if the unregistered scheme is offshore it can provide a tax-free roll up vehicle.
Also, 'excluded benefits' may not be taxable. Excluded benefits are:
•benefits in respect of ill-health or disablement of an employee during service,
•benefits in respect of the death by accident of an employee during service,
•benefits under a relevant life policy, and
•benefits of any description prescribed by regulations made by the Board of Inland Revenue.
July's article will dig further into unregistered schemes.
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