We have all heard a lot of talk over the past year about pension simplification rules in the UK and ...
We have all heard a lot of talk over the past year about pension simplification rules in the UK and A-Day but what does it all mean for overseas pensions business such as corresponding approval and s615 schemes?
The Inland Revenue has been willing to respond to industry concerns but - inevitably, given the size of the task at hand - information on the detailed rules for each conceivable scenario has been slow to emerge.
The position seems worse when a business involves something obscure and the wait for decisions on all the 'what happens if…' questions can be very frustrating.
But now it looks as if much of the work in this area is becoming clearer and we can start to plan what it means for product providers, employers and employees, trustees and scheme administrators, advisers and employee benefit consultants.
Corresponding approval schemes
These are schemes where non-UK-domiciled members of overseas schemes and their employers can claim relief (to be known after A-Day as Migrant Member Relief, or MMR) on their UK contributions.
The first thing to note is that both members and their employers can continue to claim relief, even if the scheme or member would not continue to qualify under the new rules.
Secondly, as for UK schemes, past contributions do not count towards the lifetime allowance but, unlike UK schemes, overseas scheme members do not need to apply for primary or enhanced protection for their accumulated fund.
One key area of uncertainty involves recognised schemes set up in a third country after A-Day. These are typically for senior internationally-mobile employees of multinationals who are transferred to work in a UK branch. Under current rules, they can be established in jurisdictions as diverse as Jersey and Hong Kong - provided they comply with all the rules for approval and the employer has an operating presence there.
However, the new qualifying rules say that tax relief must be available against either contributions to, or benefits from, a scheme prior to the member's UK residence. Previously the scheme was acceptable if it was recognised by the tax authority in the country it was established in.
In most cases, third country schemes would still appear to be acceptable, but only if tax exemptions can be considered as being tax relief. The Revenue is being asked to confirm this point and we will no doubt find out soon whether new (post A-Day) schemes can continue to be established in this way in appropriate circumstances.
The Revenue will be requiring overseas schemes' trustees to report to them under the Prescribed Information Requirements Regulations before MMR will be given to future new schemes (or new members of existing schemes). However, it is not yet clear if those regulations will apply to current members of existing overseas schemes - or how such information would be obtained if it is not currently required.
Going forward, scheme trustees will need to separate pre and post-A-Day funds and ensure annual and lifetime allowances are not exceeded. Additional information on crystallisation events will also be required, although the Revenue has said the responsibility for payment of any charge lies with the overseas scheme member.
Section 615 Schemes
In many respects, these are the opposite of correspondingly approved schemes in that they are for UK domiciles working overseas.
The Revenue has said these arrangements will not be necessary in future, as these individuals will be allowed to continue making UK contributions (in line with current EU policy on mutually-recognised approved domestic schemes). However, chapter six of the Finance Act 2005 does allow such schemes to continue receiving relief on UK contributions.
It seems clear that s615 schemes will continue as before, but with the option available for employees to continue using their UK scheme.
In terms of where that leaves current members, it assumes that they will be in the same position as those in corresponding schemes; the allowances start from zero at A-Day and they will not need to protect their pre-A-Day fund.
ESC A10 - UK concessions
Under current extra statutory concessions, a full or partial tax exemption is allowed on benefits from overseas schemes taken in the UK. This is relevant to the taxation of benefits from corresponding and s615 schemes where the member remains in, or returns to, the UK and particularly where benefits include lump sum payments.
However this remains an uncertain area and the Revenue has not yet said if it will be extending A10 to new schemes or even retaining it for existing schemes. Tax planners and product providers such as ZIL are waiting for the full story to emerge.
Administrators of existing schemes may find themselves ill-equipped to report information to the Revenue after A-Day. Even though they are not liable to make any payment, they will need to identify payments made in and out of schemes, before and after A-Day against the new limits and other requirements.
One option might be for them to find a product provider who has made the necessary reporting changes to administer the scheme assets. Providers such as Zurich International Life are currently considering system changes that will segregate pre and post-A-Day scheme assets, monitor annual and lifetime limits and identify crystallised benefits.
The exact effect of all of this on current and new schemes rather depends on what new rules emerge between now and A-Day. The Revenue has said it is keen to wrap this work up as soon as it can. Individuals involved in this business should be thinking about what they should be doing before next April.
Corresponding scheme members should consider investing as much as possible (and appropriate) into their scheme before April 2006 to maximise their UK tax relief.
Scheme trustees and administrators should prepare for the new reporting requirements - perhaps by looking to transfer scheme assets to a different product provider.
Insurers and other product providers need to be able to produce separate reports on assets under management. They also need to consider changes to products that will develop their proposition.
Employee benefits consultants and other interested parties need to consider what are the best solutions for future retirement benefits planning.
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