Finance Bill

House of Commons

Session 2003 - 04
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Finance Bill

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
469

      (2)
This paragraph only applies if notice of intention to rely on it is given in
accordance with regulations made by the Board of Inland Revenue.
      (3)
Where this paragraph applies in the case of an individual there is no liability
to the lifetime allowance charge in respect of the individual.
      (4)
An individual has a relevant existing arrangement if—
5
(a)
before 6th April 2006 an arrangement relating to the individual has
been made under a pension scheme within paragraph 1(1), and
(b)
the pension scheme becomes a registered pension scheme on that
date.
      (5)
Notice of intention to rely on this paragraph in relation to the individual
10
may not be given in a case where—
(a)
any of the individual’s relevant existing arrangements are
arrangements in the case of which paragraph 9 applies, and
(b)
the (actual) value of the individual’s uncrystallised rights on 5th
April 2006 under the arrangement, or any of the arrangements,
15
(calculated in accordance with paragraph 8) exceeds the amount
calculated in accordance with paragraph 9(3),

unless such rights as (in accordance with regulations made by the Board of
Inland Revenue) are to be treated as representing the amount of the excess
have been surrendered.
20
      (6)
For the purposes of sub-paragraph (5) the individual’s rights are
“uncrystallised” if the individual has not, on 5th April 2006, become entitled
to the present payment of benefits in respect of the rights (the individual
being treated as entitled to the present payment of benefits in respect of any
accrued rights in relation to which the individual has, under section 634A(1)
25
of ICTA, made an election to defer the purchase of an annuity).
      (7)
For the purposes of sub-paragraph (1)(b) an arrangement is a permitted
transfer arrangement if —
(a)
it is made only so that any sums or assets held for the purposes of, or
representing accrued rights under, an arrangement under a
30
registered pension scheme or a recognised overseas pension scheme
may be transferred so as to become sums or assets held for the
purposes of, or representing rights under, the arrangement, and
(b)
the amount of any sums, and market value of any assets, transferred
is, applying normal actuarial practice, equivalent before and after the
35
transfer.
13    (1)
Relevant benefit accrual occurs in relation to an individual under an
arrangement under a registered pension scheme—
(a)
in the case of a cash balance arrangement, if the value of the
individual’s rights under the arrangement immediately before a
40
benefit crystallisation event occurs in relation to the individual and
the arrangement exceeds their value on 5th April 2006 by more than
the permitted percentage,
(b)
in the case of a money purchase arrangement that is not a cash
balance arrangement, if a relevant contribution is paid under the
45
arrangement, or
(c)
in the case of a defined benefits arrangement, if sub-paragraph (5)
applies.
      (2)
For the purposes of sub-paragraph (1)(a)—

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
470

(a)
the value of the individual’s rights under the arrangement at any
time is the amount which would be available for the provision of
benefits under the arrangement to or in respect of the individual at
that time, and
(b)
“the permitted percentage” is the percentage by which the retail
5
prices index for the month in which the benefit crystallisation event
occurs is higher than that for April 2006.
      (3)
For the purposes of sub-paragraph (1)(b) a relevant contribution is paid
under the arrangement if—
(a)
a relievable pension contribution is paid by or on behalf of the
10
individual under the arrangement,
(b)
a contribution is paid in respect of the individual under the
arrangement by an employer of the individual, or
(c)
a contribution paid by an employer of the individual otherwise than
in respect of the individual subsequently becomes held for the
15
purposes of the provision under the arrangement of benefits to or in
respect of the individual.
      (4)
But the following are not relevant contributions for the purposes of sub-
paragraph (1)(b)—
(a)
contributions which may be applied only for the provision of
20
benefits in respect of the individual after the individual’s death, and
(b)
minimum payments under section 8 of the Pension Schemes Act
1993 (c. 48) or section 4 of the Pension Schemes (Northern Ireland)
Act 1993 (c. 49) or any amount recovered under regulations made
under subsection (3) of either of those sections.
25
      (5)
This sub-paragraph applies if—
(a)
there is an increase in the value of the individual’s rights under the
arrangement which is attributable either to service after 5th April
2006 or an increase in the rate at which the individual’s rights accrue
under the arrangement, or
30
(b)
paragraph 14 (benefits calculated by reference to excessive earnings)
applies in relation to the arrangement.
      (6)
The references in sub-paragraph (1) to a cash balance arrangement, a money
purchase arrangement that is not a cash balance arrangement and a defined
benefits arrangement include (respectively) a hybrid arrangement under
35
which the benefits that may be provided to or in respect of the individual are
cash balance benefits, other money purchase benefits or defined benefits.
14    (1)
This paragraph applies in relation to an arrangement if, immediately before
a benefit crystallisation event occurs in relation to the individual and the
arrangement, the amount of the relevant earnings exceeds the permitted
40
amount.
      (2)
But this paragraph does not apply if the arrangement is under a pension
scheme within paragraph 1(1)(c) or (e).
      (3)
For the purposes of this paragraph and paragraphs 15 and 16 earnings are
“relevant” if they are earnings by reference to which benefits are payable
45
under the arrangement to or in respect of the individual.
      (4)
For those purposes the amount of the relevant earnings means—
(a)
in relation to any time before 6th April 2006, so much of the relevant
earnings as would have been taken into account under the

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
471

arrangement for calculating benefits payable to or in respect of the
individual, and
(b)
in relation to any time on or after that date, so much of such of the
relevant earnings as both would be so taken into account and are
relevant UK earnings,
5

together, if the individual is absent from work due to pregnancy or
childbirth, with earnings which would be likely to be within whichever of
paragraphs (a) and (b) applies if the individual were not so absent.
      (5)
“The permitted amount” is the greater of—
(a)
the amount of the relevant earnings on 5th April 2006, and
10
(b)
the post-commencement earnings limit (see paragraphs 15 and 16).
15    (1)
This paragraph specifies the post-commencement earnings limit if the
individual was on 5th April 2006 a person in relation to whom section 590C
of ICTA (earnings cap) had effect in relation to the pension scheme under
which the arrangement was made
15
      (2)
The post-commencement earnings limit is the lesser of amount A and
amount B.
      (3)
Amount A is 7.5% of the standard lifetime allowance when the benefit
crystallisation event occurs.
      (4)
Amount B is the amount of the relevant earnings for the best period of 12
20
months during the appropriate three year period.
      (5)
The appropriate three year period is the period of three years ending with
the time when the benefit crystallisation event occurs or, if earlier, with the
time when the relevant earnings were last paid.
      (6)
A period of 12 months during the appropriate three year period is the best
25
period of 12 months during the appropriate three year period if the amount
of the relevant earnings are greater for that period of 12 months than for any
other period of 12 months during the appropriate three year period.
16    (1)
This paragraph specifies the post-commencement earnings in any other
case.
30
      (2)
The post-commencement earnings limit is—
(a)
if amount B is not greater than amount A, amount B, and
(b)
otherwise, amount C.
      (3)
Amount A and amount B have the same meanings as in paragraph 15.
      (4)
Amount C is the greater of—
35
(a)
amount A, and
(b)
amount D.
      (5)
Amount D is—

where ETY is the amount of the relevant earnings for the appropriate three
year period (within the meaning of paragraph 15).
40
Pre-commencement pension credits
17    (1)
This paragraph makes provision for the operation of a lifetime allowance
enhancement factor in relation to all benefit crystallisation events occurring
in relation to an individual where before 6th April 2006 the individual has

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
472

acquired rights under a pension scheme within paragraph 1(1) by virtue of
having become entitled to a pension credit.
      (2)
The lifetime allowance enhancement factor is the pre-commencement
pension credit factor.
      (3)
The pre-commencement pension credit factor is—
5

where—
IAPC is the amount which is the appropriate amount for the purposes
of section 29(1) of WRPA 1999 or Article 26(1) of WRP(NI)O 1999 in
relation to the pension credit, as increased by the percentage
specified in sub-paragraph (4), and
10
SLA is £1,500,000 (the standard lifetime allowance for the tax year
2006-07).
      (4)
The percentage is the percentage by which the retail prices index for April
2006 is greater than that for the month in which the rights were acquired.
      (5)
This paragraph does not apply in the case of an individual if paragraph 7
15
(primary protection) applies in relation to the individual.
      (6)
This paragraph only applies if notice of intention to rely on this paragraph
is given to the Inland Revenue in accordance with regulations made by the
Board of Inland Revenue.
Individuals permitted to take pension before normal minimum pension age
20
18    (1)
This paragraph applies where a benefit crystallisation event occurs in
relation to an individual who is a member of a registered pension scheme—
(a)
in protected circumstances, and
(b)
before the individual reaches normal minimum pension age.
      (2)
What would otherwise be the individual’s lifetime allowance is to be
25
reduced by the relevant percentage.
      (3)
A benefit crystallisation event occurs in protected circumstances if—
(a)
paragraph 21 or 22 (right to take pension before normal minimum
pension age) applies to the individual and the pension scheme,
(b)
the individual’s protected pension age (see paragraph 21(4) and (5)
30
or paragraph 22(4)) is less than 50, and
(c)
the pension scheme is not prescribed by regulations made by the
Board of Inland Revenue.
      (4)
The relevant percentage is—

where Y is the number of complete years falling between the date on which
35
the benefit crystallisation event occurs and the date on which the individual
will reach normal minimum pension age.
      (5)
Sub-paragraph (6) applies where, after the occurrence in relation to the
individual of a benefit crystallisation event in relation to which this
paragraph has had effect, another benefit crystallisation event occurs in
40
relation to the individual and the pension scheme.
      (6)
If the amount crystallised on the previous benefit crystallisation event
exceeded the available amount of the individual’s lifetime allowance at the
time of that benefit crystallisation event, section 208 (availability of

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 3 — Pre-commencement benefit rights
473

individual’s lifetime allowance) applies as if the amount crystallised were
the available amount of the individual’s lifetime allowance at that time.
Pre-commencement pensions
19    (1)
This paragraph makes provision about an individual who, on 5th April 2006,
has an actual (rather than a prospective) right to the payment of one or more
5
relevant existing pensions.
      (2)
Section 208 (availability of individual’s lifetime allowance) applies as if,
immediately before the first benefit crystallisation event occurring in
relation to the individual, a benefit crystallisation event had occurred in
relation to the individual and the amount crystallised was the value of the
10
individual’s pre-commencement pension rights immediately before the
benefit crystallisation event.
      (3)
The value of the individual’s pre-commencement pension rights at any time
is—

where (subject to sub-paragraph (4)) ARP is an amount equal to the annual
15
rate at which the relevant existing pension is payable to the individual at
that time or, if more than one relevant existing pension is payable to the
individual at that time, to the aggregate of the annual rates at which each of
the relevant existing pensions is so payable.
      (4)
In the case of unsecured pension or alternatively secured pension ARP is the
20
maximum amount that may be paid in the unsecured pension year or
alternatively secured pension year in which the time falls in accordance with
pension rule 5 or pension rule 7 (see section 155).
      (5)
In this paragraph “relevant existing pension” has the same meaning as in
paragraph 10(2); and paragraph 10(3) and (4) operate for the purposes of this
25
paragraph for determining the annual rate at which a relevant existing
pension is payable on 5th April 2006.
Part 3
Pre-commencement benefit rights
Rights to take pension before normal minimum pension age
30
20    (1)
If paragraph 21 or 22 applies in relation to a registered pension scheme and
a member of the pension scheme, this Part (except for paragraph 18) has
effect in relation to the member and the pension scheme as if references to
normal minimum pension age were to the member’s protected pension age.
      (2)
Paragraphs 21(4) and (5) and 22(4) define the member’s protected pension
35
age.
21    (1)
This paragraph applies in relation to a registered pension scheme and a
member of the pension scheme if—
(a)
on 5th April 2006 the pension scheme was within any of paragraphs
(a) to (e) of paragraph 1(1), and
40
(b)
the entitlement condition (in sub-paragraph (2)) and the retirement
condition (in sub-paragraph (3)) are met.
      (2)
The entitlement condition is that—

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 3 — Pre-commencement benefit rights
474

(a)
in the case of a relevant statutory scheme as defined in section 611A
of ICTA or a pension scheme treated by the Inland Revenue as if it
were such a relevant statutory scheme, on 5th April 2006 the member
had an actual or prospective right under the pension scheme to a
pension from an age of less than 55, or
5
(b)
in any other case, the member had such a right under the pension
scheme throughout the period beginning with 10th December 2003
and ending with 5th April 2006.
      (3)
The retirement condition is that —
(a)
there is only one occasion on which the member becomes entitled to
10
a pension under the pension scheme, and
(b)
the member is not employed by a sponsoring employer after
becoming entitled to a pension under the pension scheme.
      (4)
If the age from which the member had an actual or prospective right to a
pension under the pension scheme is 50 or less, the member’s protected
15
pension age is that age.
      (5)
If the age from which the member had an actual or prospective right to a
pension under the pension scheme is greater than 50 and less than 55, the
member’s protected pension age is—
(a)
before 6th April 2010, 50, and
20
(b)
on and after 6th April 2010, the age from which the member had an
actual or prospective right to a pension under the pension scheme.
22    (1)
This paragraph applies in relation to a registered pension scheme and a
member of the pension scheme if—
(a)
on 5th April 2006 the pension scheme was a personal pension scheme
25
approved under Chapter 4 of Part 14 of ICTA, an annuity contract or
trust scheme approved under section 620 or 621 of ICTA or a
substituted contract within the meaning of section 622(3) of ICTA,
and
(b)
the entitlement condition (in sub-paragraph (2)) and the retirement
30
condition (in sub-paragraph (3)) are met.
      (2)
The entitlement condition is that—
(a)
on 5th April 2006 the member had an actual or prospective right
under the pension scheme to a pension from an age of less than 50,
and
35
(b)
the member’s occupation was on that date (or had been) one
prescribed by regulations made by the Board of Inland Revenue.
      (3)
The retirement condition is that there is only one occasion on which the
member becomes entitled to a pension under the pension scheme.
      (4)
The member’s protected pension age is the age from which the member had
40
an actual or prospective right to a pension under the pension scheme.
Lump sum rights exceeding £375,000: primary and enhanced protection
23    (1)
If the lump sum condition and the registration condition are met in relation
to an individual—
(a)
paragraphs 25 to 27 (which modify Schedule 29 in relation to pension
45
commencement lump sums), and
(b)
paragraph 28 (which makes provision about scheme chargeable
payments),

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 3 — Pre-commencement benefit rights
475


apply in relation to the individual.
      (2)
The lump sum condition is met if on 5th April 2006 the amount of an
individual’s total lump sum rights exceeds £375,000 (25% of the standard
lifetime allowance for the tax year 2006-07).
      (3)
Paragraph 24 defines the amount of an individual’s total lump sum rights on
5
that date.
      (4)
The registration condition is met if either or both of the notice requirements
is met.
      (5)
The first notice requirement is met if notice of intention to rely on paragraph
7 (primary protection: pre-commencement funds above £1,500,000) is given
10
to the Inland Revenue in accordance with regulations under that paragraph
in relation to the individual.
      (6)
The second notice requirement is met if notice of intention to rely on
paragraph 12 (enhanced protection: no relevant benefit accrual post-
commencement) is given to the Inland Revenue in accordance with
15
regulations under that paragraph in relation to the individual.
24    (1)
The amount of an individual’s total lump sum rights on 5th April 2006 is—

where—
VCPR is the value of the individual’s relevant crystallised pension
rights on 5th April 2006, calculated in accordance with paragraph
20
10, and
VULSR is the value of the individual’s relevant uncrystallised lump
sum rights on that date.
      (2)
The value of the individual’s relevant uncrystallised lump sum rights on 5th
April 2006 is the aggregate value of the individual’s uncrystallised lump
25
sum rights on that date under each relevant pension arrangement relating to
the individual.
      (3)
An uncrystallised lump sum right is a right to a lump sum which on 5th
April 2006 is prospective (rather than actual).
      (4)
An arrangement is a “relevant pension arrangement” if it is an arrangement
30
under a pension scheme within paragraph 1(1).
      (5)
The value of the individual’s uncrystallised lump sum rights under an
arrangement on 5th April 2006—
(a)
in the case of an arrangement under a pension scheme falling within
paragraph 1(1)(f), is 25% of the value of the funds held for the
35
purposes of the arrangement on that date, and
(b)
in the case of any other arrangement, is an amount calculated in
accordance with sub-paragraph (6).
      (6)
The amount is the amount of any lump sum to which the individual would
(on the assumptions in sub-paragraph (7)) have been entitled under the
40
arrangement on 5th April 2006 if, on that date, the individual had acquired
an actual (rather than a prospective) right to receive a lump sum under the
arrangement.
      (7)
The assumptions referred to in sub-paragraph (6) are that—
(a)
if the individual had not reached the age of 50 on 5th April 2006, that
45
the individual reached that age on that date, and