8. TAX—FINANCE
BILL CLAUSES
We note that the draft clause in the Finance
Bill primarily addresses those few schemes which will have mandatory
approval under s.590 ICTA and that corresponding changes will
be made to the Inland Revenue's discretionary practice for approving
schemes under s.591. We would welcome the opportunity to comment
in advance on the proposed changes to the Practice Notes issues
by the Pension Schemes Office.
8.1 Draft Finance Bill Schedule 1
Paragraph 1(4)
We note that it has been considered necessary
to make it clear that a pension sharing order would not contravene
the prohibitions in s.590 on surrender, commutation and assignment.
We would have thought that a pension sharing order would not in
any event have contravened these restrictions (in the same way
as a provision providing for benefits to be forfeited on bankruptcy
would not have done).
Paragraph 1(5)
It is not clear to us which is the pension to
which 2.25 is to be multiplied. We assume from the explanatory
notes that it is intended to be the pension prior to the deduction
of the negative deferred benefit. But how is this intended to
work for money purchase schemes? The example in the explanatory
notes dealing with Clause 6 of the Pension Sharing Bill (reduction
of benefit) envisages that a deduction will be made from the member's
"pot" at the time of making a pension sharing order
in relation to money purchase benefits. How in these circumstances
will the deduction be valued for the purposes of applying Inland
Revenue limits at the time of the member's retirement?
Paragraph 1(6)
Is it intended that the ex-spouse's pension
cannot be paid before age 60? (s.590(3A)(b))
Is it intended that a widow/er's pension can
only be paid if the ex-spouse has reached age 60? (s.590(3A)(d))
In this context, we refer you to the comments
made in paragraph 3.2 of this response in relation to the debit.
As noted there, it seems that there could be a mismatch between
the benefits to which the cash equivalent relates, which have
to be reduced, and the benefits which actually become payable.
It seems to us that this must inevitably lead to a situation where
a particular benefit could be paid out in an amount which would
otherwise have exceeded Inland Revenue limits.
For example, if both employee and former spouse
were to die before retirement, the total benefits paid out could
exceed the maximum which would otherwise have been payable on
death in service. We should be grateful for confirmation that
this is acknowledged and accepted.
Paragraph 3 (Unapproved Retirement Benefits
Schemes)
Further changes are necessary to deal with the
position of unapproved schemes. In particular:
If an external transfer were to be made in relation
to an unfunded arrangement, is it intended that a tax charge would
arise? Under the proposed amendments to s.595(5), it would appear
generally not, because any "sum paid" will be with a
view to the provision of relevant benefits for the former spouse
of an employee, and the former spouse will not be within s.595(5)
unless he or she is also a "dependant" of the employee,
which he or she may be—it would seem anomalous if tax is
payable where there is maintenance, but not where there is an
immediate clean break.
In a FURBS the employee is taxed on the employer's
contributions, and his or her own contributions come out of taxed
income. This may give rise to inequities if the fund is split
with no changes to the tax consequences. It should be made clear
whether amounts paid to the spouse are tax free, as the employee
has already paid tax under s.595 of ICTA on the contributions,
or not. S.596 of ICTA has been amended in the draft Finance Bill
to prevent an employee being given tax relief on the contribution
where he or she does not in the end receive any benefit, if the
reason they receive no benefit is because of the pension credit
for the former spouse. Is it therefore intended that the employee
is to carry the whole tax burden for the unapproved scheme and
none should fall on the spouse?
Where an employee has been assessed to tax in
respect of the contribution paid to a FURBS and an external transfer
is made from that scheme to another such scheme pursuant to a
pension sharing order, there should be no tax on the transfer
and no further tax should be payable when a lump sum is subsequently
paid from the recipient scheme. S.596A(8) and/or s.595(5) should
be amended to achieve this effect by including the ex-spouse and
(in s.596A(8)(c)) anyone designated by him or her.
Funded unapproved salary-related schemes (which
are rare but which do exist) must still comply with the negative
deferred pension provisions. What is the tax effect of this on
the employee?
Paragraph 11
We would welcome amendments to s.636 to make
it clear that it is only the amount of the annuity remaining after
a pension sharing order or agreement which is relevant for the
purpose of the limit on survivors' annuities, but the wording
of the proposed new s.636(3A) seems obscure.
8.2 General
Personal Pensions
We should be grateful for clarification as to
whether an ex-spouse may enter into personal pension arrangements
with a view only to receiving an external transfer made under
paragraph 1(3) of schedule 2 to the Pension Sharing Bill (ie the
ex-spouse will make no further contributions to the personal pension
arrangement).
Is it intended to make further regulations under
s.638(2) ICTA requiring the trustees or managers of personal pension
schemes to make external transfers in any circumstances or is
it intended that this would be left to the discretion of the managers
of the scheme, bearing in mind that an external transfer would
not otherwise infringe tax approval requirements.
Annuity contracts
We would welcome clarification that an annuity
contract entered into for the purpose of receiving an external
transfer from an approved retirement benefits scheme would class
as "pension business" under s.431B ICTA. S.431B(2)(d)
refers to the contract being made with the persons having the
management of the scheme, or those persons and a "member
of or contributor to" the scheme. We would have expected
that an annuity contract set up to receive an external transfer
would have been made with the persons having the management of
the scheme and the ex-spouse: these terms are not defined in this
part of ICTA but we would not regard the ex-spouse as either a
member of nor a contributor to the scheme, and accordingly we
believe that s.431B(2)(d) needs to be extended.
Similarly, should it be clarified that an annuity
contact issued to receive an external transfer from a personal
pension scheme is a contract "made under" approved personal
pension arrangements within s.431B(2)(c)?
