Finance Act 2008

Members who don't opt for transitional protection (i.e. primary or enhanced protection) but who had the right to more than 25% of their benefits value at 5 April 2006 as tax-free cash can still have the higher percentage paid at vesting.

The tax-free cash amount will be based on the amount of tax-free cash at 5 April 2006 increased in line with the lifetime allowance, up to their vesting date. These members will only build up tax-free cash in respect of post A-Day benefits if they have 'relevant benefit accrual' under the same arrangement.

The requirement to check whether 'relevant benefit accrual' has occurred has been removed.

This change could be particularly significant for members who have protected pre A-Day tax-free cash, which is held under a money purchase scheme to which no further contributions can be paid on or after A-Day (i.e. no 'relevant benefit accrual').

For example, there may be members with protected cash held under a section 32 arrangement, which does not permit the payment of further contributions. This change could enable the member to obtain a higher tax-free cash sum from that scheme where the member's chosen investment funds have performed well.

Before this change can be implemented product providers may need to update computer systems to allow this.

This change is backdated to 6 April 2006.

A number of situations have been identified where pension schemes make payments that are classed as unauthorised, but which were not intended to be caught as such under the post A-Day rules. Legislation has been amended to allow the following to be authorised payments:

• an overpayment of an ongoing pension
• a pension which continues to be paid after the member has died
• certain payments made after the member has died where payment should have started before death, but this wasn't possible.

These changes are backdated to 6 April 2006. The Act allows Regulations to be laid in the future that increase the number of authorised member payments. The Regulations will:

• allow Regulations to have effect for payments already made provided they do not increase a person's liability to tax
• describe how these payments must be treated for income tax purposes and who the tax charge should apply to, and
• ensure the payments can be tested against the lifetime allowance, if necessary.
  The above changes will ensure these payments can be treated and be taxed as authorised payments.

Where a member of a pension scheme dies this may result in an increase in pension rights of another scheme member/dependant who was in receipt of a lifetime annuity, scheme pension, dependant's annuity or dependant's scheme pension.

Where a member of a scheme receives an increase in pension rights due to the death of a 'connected member' this will be subject to tax charges. This will apply if the scheme member/dependant was in receipt of a lifetime annuity, scheme pension, dependant's annuity or dependant's scheme pension.

This is in respect of the death of the original member/ dependant on or after 6 April 2008.

Existing anti-avoidance rules have been increased to:

• impose unauthorised payments charges if a member who has rights to a lifetime annuity, scheme pension, a dependant's scheme pension or a dependant's annuity dies and a connected person becomes entitled to an increase in their pension rights under the scheme that is attributable to that death.
• impose an Inheritance Tax charge if a member with a lifetime annuity, scheme pension, a dependant's scheme pension or a dependant's annuity dies aged 75 or over and there is an increase in pension rights attributable to the death of a member or an unauthorised lump sum payment in respect of the deceased's pension scheme arrangement.

This will not apply to schemes with 20 or more members where the increase in rights applies at the same rate to each of the members.

The payment of a scheme pension is caught by BCE 2 but BCE 3 is triggered when a scheme pension is increased beyond a permitted margin.

In most circumstances, the permitted margin is the greater of 5% or RPI per year. A scheme can give an increase beyond the permitted margin without triggering BCE 3 if the scheme has 50 or more pensioner members and the increase applies to them all.

The exemption will be widened to cover an increase given to a group of at least 20 pensioner members at the same time and at the same rate, not necessarily to all pensioner members.

If the increase in pension is less than £250 per year a test is not required.

A provision for rounding has been introduced so that once the pension increase has been awarded it can be increased to the nearest whole number without the need for a further test. Also schemes will be allowed to use the figure for RPI for any month which is within 12 months before the increase in pension.

These changes have been backdated to have effect from 6 April 2006, except for the change to the RPI calculation date, which applies from 6 April 2008.

For occupational pension schemes an investment-regulated pension scheme is one where:

• there are 50 or fewer members and one or more of those members, or their relative has any control over how the scheme funds are invested

or

• a scheme of any size where at least 10% of the scheme members meet the above condition.

An occupational pension scheme can also be an investment-regulated pension scheme where:

• one or more of its members or their relative is able to (whether directly or indirectly) control how their own funds are invested. This is to prevent large occupational schemes setting up separate sections that allow particular classes of members to control where their own funds are invested.

The condition that a scheme can be classed as an investment-regulated pension scheme if at least 10% of the members can control where the scheme funds are invested has been removed.

This does not mean that large pension schemes are exempt from the taxable property rules. Schemes where one or more of its members or their relative is able to control how their own funds are invested are still treated as investment-regulated pension schemes.

This change is backdated to 6 April 2006.