FOR ADVISERS ONLY
Finance Act 2007
Alternatively secured pensions
Alternatively secured pension is an alternative to annuity purchase and is only open to those aged 75 and over. When alternatively secured pension was introduced in April 2006 there was no minimum level of income that had to drawn and the maximum level of income available was 70% of the relevant GAD rate with no guarantee at age 75. Income levels must be reviewed each year.
Changes brought in by the Finance Act increased the minimum level of income to 55% and the maximum level of income increased to 90% with effect from April 2007. These limits still need to be reviewed annually.
If a member does not take at least the minimum income in a pension year the balance between the minimum income and the income taken will be taxed at 40%.
Changes have also been made to the death benefits of someone in alternatively secured pension when they die. One of the options that was available from A-Day was the payment of a lump sum death benefit to other members of the same registered pension scheme, known as a transfer lump sum death benefit (TLSDB). Since April 2007 this TLSDB is no longer an authorised payment which means that tax of up to 70% plus inheritance tax will apply.
The changes at a glance:
| Previous rules | Rules from April 2007 | |
|---|---|---|
| Minimum level of income | Nil. | 55% of the relevant GAD rate with no guarantee at age 75. |
| Maximum level of income | 70% of the relevant GAD rate with no guarantee at age 75. | 90% of the relevant GAD rate with no guarantee at age 75. |
| Death benefits options | If there is no dependant then:
|
If there is no dependant then:
|
| Guarantee | Pension could be guaranteed for up to 10 years. | No guarantee allowed.
|
|
Members who cannot be traced This does not apply to people who were already in unsecured pension. |
Members who could not be traced at age 75 would automatically be placed in ASP. Once in ASP it is not possible to take any PCLS. | Members are no longer automatically placed in ASP provided the scheme administrator has taken reasonable steps to trace them. The money will be placed in suspense until they are traced. Once traced they have 6 months to make a decision regarding their pension. If no decision is made they will be placed in ASP and minimum income must be taken. As long as the scheme rules are updated, this can apply to all members that were not traceable since 6/4/06. |
| Charity lump sum death benefits | If the member died with no dependants the remaining ASP fund could be paid to a charity that the member had nominated before their death. | If the member had nominated no charity before their death the scheme administrator can nominate one. |
Pension term assurance
The Finance Act changed the way that member contributions to pension term assurance is taxed. Tax relief on these contributions has been removed for new contracts. Tax relief on these contributions has been removed for new contracts.
Any member contribution that is used to pay premiums to a pension term assurance policy will not receive tax relief where it is paid to:
- an occupational pension scheme after 31 July 2007, or
- any other registered pension scheme after 5 April 2007.
Certain policies are protected from the new legislation, and member contributions to these policies may continue to receive tax relief. Protected policies are:
- any policy issued under an occupational pension scheme before 1 August 2007 where the insurer had received the application for the policy before 29 March 2007, and
- any policy issued under a non-occupational pension scheme before 1 August 2007 where the insurer had received the application before:
- 14 December 2006 where the member has no pension rights under the scheme, or
- 13 April 2007 where the member also has, or is accruing, pension rights under the same scheme.
Not all policies are affected. Most pension contracts (with integrated term assurances) that was entered into before 13 April 2007 are unaffected by the change provided the amount of term assurance or term of the plan has not been increased since that date.
No change has been made to the tax relief on employer contributions to pension term assurance or group life contracts where the premium is paid by the employer.
Other changes introduced by the Finance Act
Summaries of some additional changes are below:
| Change | Summary | Effective date |
|---|---|---|
|
Who can establish a personal pension scheme |
Any application for registration of a personal pension scheme can be made only if the scheme has been established by a person with permission to do so in the UK under the Financial Services and Markets Act 2000. | 6 April 2007 |
|
Transfers and enhanced protection |
The circumstances in which a transfer can take place without loss of enhanced protection has been extended to include:
|
6 April 2006 |
|
Transitional protection |
New legislation now means that primary and enhanced protection is not lost where changes are made to an occupational pension scheme if the changes are:
|
6 April 2006 |
|
Ill-health retirement |
To allow scheme pensions paid on ill-health early retirement to be reduced at the discretion of the scheme administrator. | 6 April 2006 |
|
Pension commencement lump sum rules |
PCLS may be paid any time within an 18 month period starting 6 months before and ending 12 months after the date when the member becomes entitled to the related pension. If the member dies after the payment of the PCLS but before becoming entitled to the relevant pension, entitlement to the PCLS is deemed to have arisen immediately before death. This entitlement to the PCLS must have arisen before the member's 75th birthday | 6 April 2006 |
|
Unsecured pension fund rules |
Member can request that their maximum income be reviewed more frequently than every 5 years. A new reference period will start on the date of the next unsecured pension year. | 6 December 2006 |
|
2 year limit on lump sum death benefits |
Allow lump sum death benefits to be paid within 2 years of the scheme being notified of the member's death, but if the scheme administrator should have been aware of the member's death earlier than this the 2 years limit will start at the earlier date. | 6 April 2006 |
|
Winding-up lump sums - conditions to be satisfied |
A lump sum can be paid if the member's scheme is winding-up and the value of their benefits in that scheme is less than the triviality limits. One of the conditions is that the member's employer cannot be contributing to the scheme and will not for a period of 12 months after the payment of the lump sum. The Finance Act changed the meaning of employer to any person by whom the member is employed at the time when the lump sum is paid, and who has made contributions under the pension scheme in respect of the member within the period of five years ending with the day on which it is paid. | 6 April 2006 |
|
Investment-regulated pension schemes |
The holding in an UK-REIT by the pension scheme and associated persons must be less than 10%. | 1 January 2007 |
|
Unauthorised payments |
Some scheme administrators were holding back a portion of an unauthorised payment to cover the cost of a scheme sanction charge. This resulted in the unauthorised payment being smaller than it should have been. The rules have been changed so that the amount held back must also be included in the unauthorised payment. | 6 April 2007 |
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The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
Published 11 September 2007