Pre Budget Report 2007

On 9 October 2007 Alasdair Darling delivered the 2007 pre-budget report. This report details changes that will affect pension schemes including the spreading of tax relief on employer contributions and the rules on inheriting tax-relieved pension schemes. A summary of the changes, which will be included in Finance Bill 2008, are below:
ChangeSummaryEffective date*
Inheriting tax-relieved pension savings

Existing anti-avoidance rules will be increased to:

a) introduce an unauthorised payment charge if a member surrenders rights to payments under a lifetime annuity or dependant's annuity

b) impose unauthorised payments charges if a member who has rights to a scheme pension, a lifetime annuity, 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

c) impose an inheritance tax charge if a member with a scheme pension, a lifetime annuity, 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 and the increase in rights are applied at the same rate to each of the members.

Surrenders from 10 October 2007 and death from 6 April 2008
Spreading of tax relief for pension contributions The spreading of the tax relief for contributions that are paid by a new company or are paid to a 'substitute scheme' will still apply. A scheme will be a 'substitute scheme' if it is a registered pension scheme to which a relevant transfer (a transfer of 30% or more of the value of the original scheme) has been made in the last 2 years, or is about to be paid.

9 October 2007

Inheritance Tax and Alternatively Secured Pension If the IHT nil-band rate was not fully used when the original scheme member died, the same proportion that was unused can be added to the nil-rate band in force at the date of the spouse or civil partner's death and will be available against the ASP. 9 October 2007
Scheme investments The definition of investment-regulated pension schemes will be changed to ensure that it does not include schemes where individual members could not realistically be expected to influence scheme decisions to invest in taxable property, in particular large occupational schemes. 6 April 2006
Tax-free lump sums The way that PCLS is calculated for members of occupational pension schemes with a pre A-Day entitlement to PCLS of more than 25% is to be simplified. If contributions are paid or additional benefits accrue after A-Day it will no longer be necessary to calculate whether relevant benefit accrual has taken place. 6 April 2006
Inheritance tax on overseas pension savings IHT protection will be restored to UK tax-relieved pension savings held in overseas pension schemes. These savings will be provided with the IHT protection that is available to funds held in UK registered pension schemes. 6 April 2006

* All these measures expected to be included in Finance Bill 2008.

State Second Pension

That Pensions Act 2007 put in place proposals to reform the State Second Pension so that it would become a flat-rate top-up to the Basic State Pension by 2030. The pre budget report has brought forward this change and a decision has now been made to start these changes in 2009 when the upper accruals point will be established. The upper accruals point will be introduced and set and will be cash fixed from the point it is introduced. This will mean that from 6 April 2009 employers and employees with occupational pension schemes contracted-out of State Second Pension will receive contracted-out rebates on earnings between the lower earnings limit and the upper accruals point. Employers and employees will pay National Insurance contributions at 12.8% and 11% respectively on earnings between the upper accruals point and upper earnings limit.

Further details can be found on the HMRC website.

Pre Budget Notes 2007

Pre-Budget 2007 - Supplementary Documents

Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.

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 31 October 2007

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.