Taxing issues for 2011

Introduction

The New Year brings with it the introduction of new tax measures for pension schemes. But with 6 April 2011 fast approaching, some schemes may still need to contend with the ‘old’ tax changes. In the first of a series of publications in 2011 on pensions taxation, we look at some immediate issues for schemes.

In this Alert:

• Key points
• End of the transitional period ahead!
• Rule amendments requiring approval of HMRC
• Change of date for applying the NMPA test

Key points

• The transitional provisions in place since A-Day will end on 5 April 2011. Schemes which have not yet put in place an A-Day deed (or where such a deed was put in place for a temporary period only) should take action before 6 April 2011 to avoid unintended consequences.
• Where a scheme’s amendment power refers to the need for HMRC’s consent to its exercise, trustees should consider removing this restriction before 6 April 2011.
• HMRC has changed its interpretation of the date for assessing NMPA in the run-up to the change to NMPA from 50 to 55 in April 2010. However, members and scheme administrators who acted in reliance on HMRC’s original guidance should not incur tax charges.

End of the transitional period ahead!

On 6 April 2006 (A-Day), the system of pension scheme taxation changed significantly, with the old system of discretionary approval and Inland Revenue limits replaced by a permissive system of authorised and unauthorised payments.

Transitional Regulations were put in place to prevent the change of regime having unintended consequences for pension schemes which took no action before A-Day. However, the Regulations will fall away after 5 April 2011, so schemes which have yet to put in place a deed to deal with the A-Day changes will need to take action before then. If no steps are taken, trustees and employers could face an unexpected increase in scheme liabilities, and might also be forced to pay unauthorised payments (which would have adverse tax consequences).1

If your scheme has yet to make formal changes to deal with tax simplification, or if you are unsure what has been done so far, please contact your usual Sackers’ team.

Rule amendments requiring approval of HMRC

Prior to A-Day, some scheme amendment powers made reference to the requirement to obtain approval from the former Inland Revenue (now HMRC) in relation to changes made to the scheme’s rules. Revenue approval was necessary in order to maintain a scheme’s tax privileged status.

From A-Day, the requirement for HMRC approval was removed. However, the rules of many schemes still require HMRC clearance for rule changes.

Regulations2 were introduced in December 2009 which override the need for HMRC consent to scheme changes with effect from A-Day. But although the requirement for obtaining approval is now to all intents and purposes obsolete, the overriding provision in the Regulations only lasts until the end of the transitional period (namely, 5 April 2011). Trustees should therefore consider removing such references from scheme rules before 6 April 2011.

Change of date for applying the NMPA test

NMPA is the earliest age at which a member’s pension benefits can be taken under a registered pension scheme without higher tax charges applying. On 6 April 2010, the general position changed so that NMPA increased from age 50 to 55 (although pensions can still be paid from an earlier age if a member has a “protected pension age” or because of ill-health).

December 2009 guidance

In December 2009, HMRC issued Pension Schemes Newsletter 383, in which it attempted to explain some uncertainties surrounding the actual cut-off point for taking advantage of the then NMPA of 50. The Newsletter explained that HMRC considered the critical point to be the date on which a member became “entitled” to the benefit and first had an actual (rather than a prospective) right to payment of a pension.

HMRC’s view was that an actual right would exist once the member had “the right to a benefit without having to fulfil any further conditions or take any further actions”. This was widely understood to mean that a member who reached age 50 before 6 April 2010 and took all steps needed under the scheme rules to bring their benefits into payment, would retain the right to receive those benefits before age 55 even if they were not physically put into payment until after the change in NMPA.

Recent guidance

However, in its recent Pension Schemes Newsletter 44, HMRC states that its earlier guidance was incorrect. It now explains that the relevant date for applying the NMPA test should be “the date of the first payment of pension”. This means that if an individual received the first payment of their pension after 5 April 2010, the prevailing NMPA of 55 would apply.

HMRC is aware that scheme administrators and members acted in reliance on its December 2009 guidance. In a bid to reassure those who did, HMRC states that “in these circumstances people and schemes should not incur an unauthorised payments tax charge in respect of any payments of that pension made before age 55 is reached.”

1 For more details, please see our News: “Just when you thought it was safe to go back in the water…” (dated August 2010)
2 The Registered Pension Schemes (Modification of the Rules of Existing Schemes) Regulations 2009
3 Please see our Alert: “Changes to Normal Minimum Pension Age: HMRC Guidance” (dated 18 December 2009)