Following today's Budget announcements by the Chancellor, Gordon Brown, a number of recent key announcements and the outcome of consultation in 2005 have now finally, belatedly received clarification.

The key announcements in the Budget revolved around:

• clarification of inheritance tax (IHT) under the new Pensions Simplification regime

and

• confirmation of the final rules on the anti-avoidance measures for recycling of tax-free lump sums announced originally in the Pre-Budget Statement in December 2005.  Key points from the Budget as it affects Pension Simplification, with a summary of some of the pre announced clauses to be included in the Finance Bill 2006 follows:

Inheritance Tax for pensions Post A-Day

The rules apply on the death of a registered scheme member from 6 April 2006.

The welcome news is the concessionary practice, dating back from 1992, will continue to be available on death benefits from non-vested pensions where death occurs before 75.

There still remain circumstances where IHT could currently be charged. This will apply where an individual did not exercise their right to take a pension or income when life expectancy was seriously impaired, and where the beneficiary of those benefits is not a spouse, civil partner or financial dependant of the member. This will continue to be so in the new regime

The Budget announcement confirms this concessionary treatment will be legislated in the Finance Bill. It confirms that charity payments arising in such circumstances will also be exempt from any IHT charge.

While this is a relief to the pensions industry, the announcement also confirms the position of IHT liability on the death of a member in Alternatively Secured Pension (ASP). As the Capital Taxes Office strongly hinted in their consultation document from July 2005, the ability to transfer the value of pension funds on death to other nominated members of the registered pension scheme will be subject to an IHT charge. This will be based on the value of the assets at the member’s death. The concept of generational wealth planning is still potentially available. However, it will come at the price of an IHT charge.

Anti-Avoidance Provisions – Recycling of Tax-Free Cash Lump Sums

It is disappointing that following the Chancellor’s announcement in December 2005, and the draft Guidance issued in February this year, HMRC have decided to continue with anti-avoidance measures. This is despite their continued statements that most individuals will not be subject to the scheme member charges that will apply on breach of these rules.

It is interesting to note that where Pension Simplification is considered to be the buzzword, HMRC have released a 28 page guidance note to explain the impact of these regulations. This covers issues on where individuals will, and will not, be subject to the possibility of unauthorized member payment charges as a result of breaking these recycling rules.

HMRC have listened, to a limited degree, to concerns from the industry. While the default minimum pension commencement lump sum limit initially of £15,000 has not altered, the limit will be increased each year to a figure representing 1% of the relevant Lifetime Allowance.

Also one of the concerns of scheme providers has disappeared. Providers were worried that they would be subject to scheme sanction charges through no fault of their own where a scheme member, or former scheme member, is subject to the anti-avoidance rules. This will not now be the case provided certification is obtained from the scheme member stating that the member will not recycle their pension commencement lump sums when they are paid from maturing policies. Also, the aspect of continuing long-term accrual which could have been caught under the previous guideline appears to be limited to a two tax-year period. This is welcome, given most clients will find it difficult to plan more than 12 months ahead, let alone over four or five years.

Pension Commencement Lump Sums and Scheme Pensions

Amendments to primary legislation will be introduced to take out of legislation previously identified anomalies on calculation of the maximum pension commencement lump sum which could be paid where a scheme pension is purchased or provided from a money purchase arrangement. Therefore, the maximum pension commencement lump sum payable from such arrangements will be based on 1/3 rd of the amount used to provide the scheme pension. In simple terms, this will match the rules of all other money purchase arrangements, ensuring the pension commencement lump sum does not exceed the 25% limit which would apply for all other forms of maturing benefits.

New Benefit Crystallization Event

The ninth benefit crystallization event will be introduced within the Finance Bill 2006 and will cover a retesting against the Lifetime Allowance for a member with an unsecured pension fund reaching age 75. The amount deemed to be crystallized will be the value of the sums representing the unsecured pension fund under the arrangement at that time, less the aggregate of the amounts originally designated to provide the unsecured pension which will already have been previously tested under an earlier benefit crystallization event.

Primary and Enhanced Protection Pre A-Day Lump Sum Death Benefits

HMRC have now announced that regulations will be made to make provision for members who register for primary and/or enhanced protection on their registered pension funds at A-Day. In certain circumstances they will be allowed to protect the amount of pre April 2006 death benefits where this is greater than the protection given relative to the fund. The conditions applying on the form of protection chosen are:

Primary Protection

• That the member still has registration of primary protection on death.
• That a defined benefit or uncrystallised fund lump sum death benefit is actually paid.
• That the beneficiary of the lump sum death benefit payment notifies HMRC of their intention to rely on this provision.
• The terms of the death-in-service policy are not varied significantly to increase the benefits payable, or the period under which such a benefit could be paid from 6 April 2006.
  

Enhanced Protection

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