Just when you thought it was safe to go back in the water…

Introduction

The pensions industry breathed a collective sigh of relief when A-Day (6 April 2006) came and went, and the world did not end. Since then, transitional arrangements have lurked beneath the surface of the pensions world keeping old Inland Revenue limits in place for those schemes that took no action regarding the A-Day changes.

However, the issue of what to do about so-called tax simplification is set to rise up out of the deep again, as the transitional arrangements will expire on 5 April 2011.

Overview

FA04 brought in sweeping changes to pension scheme taxation, removing the old system of discretionary approval and Inland Revenue limits. It was replaced from A-Day with a permissive system of authorised and unauthorised payments.
If a payment is categorised as unauthorised under FA04 it will attract a penal tax charge – both for the member and the scheme.
In addition, since A-Day there have been no tax limits as such on pensions saving. Instead there is the LA (currently £1.8 million)1, the AA (currently £255,000)2 and the SAA3.
Whilst pension benefits may accrue which exceed the LA, an additional tax charge will be levied on the excess (55% if taken as a lump sum, or 25% if taken as a pension).
The Transitional Regulations were put in place to prevent the change of regime having unintended consequences for pension schemes that took no action before A-Day.
The Transitional Regulations will fall away after 5 April 2011, so schemes that have yet to put a deed in place to deal with A-Day will need to take action before then.

What do the Transitional Regulations do?

The Transitional Regulations apply to all schemes which were in place at A-Day and have not chosen to disapply them since. These Regulations have two main effects:

Preservation of old-style Inland Revenue limits (for example, the earnings cap4); and
Giving trustees and employers the power to refuse to pay benefits which are written into their scheme rules but which would be unauthorised under the post-A-Day regime.

A second set of regulations5 sits alongside the Transitional Regulations giving trustees the power to make changes that mirror the Transitional Regulations, without falling foul of either section 67 of PA95 (which regulates changes to members’ past service benefits) or any restrictions in their scheme’s own power of amendment.

What needs to be done now?

Schemes that have already put in place rules or an interim deed dealing with tax simplification matters will probably have already “hard-wired” the necessary elements of the Transitional Regulations into their deed and rules, and so no additional action before 6 April 2011 should be needed.
If your scheme has not made any changes relating to tax simplification, then amendments will be needed before 6 April 2011. If nothing is done, 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).
From the tax year 2011/12, HMRC will no longer publish an updated earnings cap. So, schemes which still calculate benefits by reference to the earnings cap will need to calculate this themselves going forward, using the method set out under tax legislation (ICTA 1988).
If your scheme has yet to make formal changes for tax simplification, or if you are unsure what has been done so far, please contact your usual Sackers’ team.

Anything else?

6 April 2011 is shaping up to be a “mini-A-Day”. As well as the end of the Transitional Regulations, we expect it to be the day for:

The introduction of additional restrictions on the amount of pensions saving which will qualify for tax relief6;
The deadline for trustee resolutions to preserve any scheme powers to make payments to employers7; and
Possibly, the change from RPI to CPI as the reference index for increases to pensions in payment and revaluation of deferred pensions8.

1 Primary and enhanced protection were introduced to provide transitional protection for those who, at A-Day, had already exceeded, or were on course to exceed the LA
2 The LA and AA are currently frozen until the tax year 2015/16
3 Introduced from 22 April 2009, this currently restricts tax-efficient pensions saving for those earning £130,000 or more
4 Currently, £123,600 for the tax year 2010/11
5 The Occupational Pension Schemes (Modification of Schemes) Regulations 2006
6 See our Alert: Restricting pensions tax relief: The Coalition’s alternative approach dated 29 July 2010
7 See our Alert: Preserving powers to refund surplus dated 24 May 2010
8 See our Alert: Pension Increases – the change from RPI to CPI dated 13 July 2010