Finance Bill

House of Commons

Session 2002 - 03
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Finance Bill

Finance Bill
Schedule 31 — Taxation of benefits under registered pension schemes
469

(5)
A lifetime allowance excess lump sum is chargeable to income tax in
accordance with sections 210 to 222 of FA 2004 (lifetime allowance
charge) but not otherwise.
(6)
In this section—

“lifetime allowance excess lump sum”,
5

“pension commencement lump sum”,

“refund of excess contributions lump sum”,

“serious ill-health lump sum”, and

“short service refund lump sum”,

have the same meaning as in section 163 of FA 2004 (see Part 1 of
10
Schedule 29 to that Act).
(7)
In this section—

“annuity protection lump sum death benefit”,

“defined benefits lump sum death benefit”,

“pension protection lump sum death benefit”,
15

“transfer lump sum death benefit”,

“uncrystallised funds lump sum death benefit”, and

“unsecured pension fund lump sum death benefit”,

have the same meaning as in section 165 of FA 2004 (see Part 2 of
Schedule 29 to that Act).
20
636B
Trivial commutation and winding-up lump sums
(1)
This section applies if—
(a)
a trivial commutation lump sum, or
(b)
a winding-up lump sum,

is paid to a member of a registered pension scheme under the pension
25
scheme.
(2)
The member is to be treated as having taxable pension income for the
tax year in which the payment is made equal to the amount of the lump
sum.
(3)
But if, immediately before the lump sum is paid, the member has not
30
become entitled to any benefits under the pension scheme, the amount
of the taxable pension income is 75% of the amount of the lump sum.
(4)
In this section—

“trivial commutation lump sum”, and

“winding-up lump sum”,
35

have the same meaning as in section 163 of FA 2004 (see Part 1 of
Schedule 29 to that Act).
636C
Trivial commutation and winding-up lump sum death benefits
(1)
This section applies if—
(a)
a trivial commutation lump sum death benefit, or
40
(b)
a winding-up lump sum death benefit,

is paid to a person under a registered pension scheme.
(2)
The person is to be treated as having taxable pension income for the tax
year in which the payment is made equal to the amount of the lump
sum.
45

Finance Bill
Schedule 32 — Registered pension schemes: benefit crystallisation events—supplementary
470

(3)
In this section—

“trivial commutation lump sum death benefit”, and

“winding-up lump sum death benefit”,

have the same meaning as in section 165 of FA 2004 (see Part 2 of
Schedule 29 to that Act).”
5
12
Omit Chapter 16 (lump sums).
13
In section 644(2) (pensions to which section 580 or 590 applies not a
disablement pension), for “580 or 590” substitute “579A”.
14    (1)
Section 683 of ITEPA 2003 (PAYE income) is amended as follows.
      (2)
In subsection (3), for the entries relating to sections 581, 584, 591, 596, 599 and
10
602 substitute—

“section 579B (pension under registered pension scheme),”.
      (3)
In that subsection, insert at the end—

“section 636B (pension treated as arising from payment of trivial
commutation lump sum or winding-up lump sum),
15

section 636C (pension treated as arising from payment of trivial
commutation or winding-up lump sum death benefit).”
      (4)
Omit subsection (4).
15
In Part 2 of Schedule 1 to ITEPA 2003 (index of defined expressions) insert at
the appropriate place—
20

“pension under a registered pension
section 579D”.

scheme (in Chapter 5A of Part 9)

Schedule 32
Section 212

Registered pension schemes: benefit crystallisation events—supplementary
General: meaning of “the relevant pension schemes”
25
1
For the purposes of the benefit crystallisation events “the relevant pension
schemes” means the registered pension schemes of which the individual is a
member (or, in the case of benefit crystallisation event 7, was a member
immediately before death).
Post-75 events not generally benefit crystallisation events
30
2
The only sort of event that constitutes a benefit crystallisation event in
relation to the individual after the individual has reached the age of 75 is an
event that constitutes benefit crystallisation event 3.
Benefit crystallisation events 1, 2 and 4: prevention of overlap
3     (1)
This paragraph applies for the purposes of benefit crystallisation event 2 if
35
the scheme pension is funded (in whole or in part) by the surrender of sums

Finance Bill
Schedule 32 — Registered pension schemes: benefit crystallisation events—supplementary
471

or assets representing the whole or part of the individual’s unsecured
pension fund.
      (2)
The amount crystallised by the event is to be reduced by the amount (or an
appropriate proportion of the amount) previously crystallised on the
designation of the sums or assets as available for the payment of unsecured
5
pension.
4     (1)
This paragraph applies for the purposes of benefit crystallisation event 4 if
the lifetime annuity is purchased (in whole or in part) with sums or assets
representing the whole or part of the individual’s unsecured pension fund.
      (2)
The amount crystallised by the event is to be reduced by the amount (or an
10
appropriate proportion of the amount) previously crystallised on the
designation of the sums or assets as available for the payment of unsecured
pension.
Benefit crystallisation events 1 and 5: hybrid arrangements
5     (1)
This paragraph applies where—
15
(a)
immediately before the individual reaches the age of 75, there is
under any of the relevant pension schemes a hybrid arrangement
relating to the individual, and
(b)
the benefits that may be provided to or in respect of the individual
under the arrangement may, depending on the circumstances, be
20
money purchase benefits or defined benefits.
      (2)
Benefit crystallisation event 1 applies as if, at that time, the circumstances are
such that the benefits to be provided are money purchase benefits (with the
effect that the sums or assets held for the purposes of the arrangement are to
be treated as having been designated as available for the provision of
25
unsecured pension to the individual).
      (3)
Benefit crystallisation event 5 applies as if, at that time, the circumstances are
such that the benefits to be provided are defined benefits.
      (4)
The amount crystallised is the greater of the amounts crystallised by the two
benefit crystallisation events.
30
Benefit crystallisation events 2, 3 and 5: meaning of “RVF”
6
For the purposes of benefit crystallisation events 2, 3 and 5 “RVF” is the
relevant valuation factor (see section 270).
Benefit crystallisation events 2 and 4: early lifetime annuities
7     (1)
This paragraph has effect if—
35
(a)
the individual becomes entitled before reaching normal minimum
pension age to the payment of a lifetime annuity purchased under a
money purchase arrangement under any of the relevant pension
schemes, and
(b)
the ill-health condition is not satisfied immediately before the
40
individual becomes so entitled.
      (2)
Benefit crystallisation event 2 applies as if—
(a)
the lifetime annuity were a scheme pension under the pension
scheme, and

Finance Bill
Schedule 32 — Registered pension schemes: benefit crystallisation events—supplementary
472

(b)
the individual becomes entitled to it only on reaching normal
minimum pension age.
      (3)
Benefit crystallisation event 4 does not apply in relation to the lifetime
annuity.
Benefit crystallisation event 2: early pensions
5
8
For the purposes of benefit crystallisation event 2 if—
(a)
the individual becomes entitled to the pension before reaching
normal minimum pension age, and
(b)
the ill-health condition is not satisfied immediately before the
individual becomes entitled to the pension,
10

the individual is to be treated as becoming entitled to it only on reaching
normal minimum pension age.
Benefit crystallisation event 2: meaning of “P”
9     (1)
For the purposes of benefit crystallisation event 2 “P” is the amount of the
pension which will be payable to the individual in the period of 12 months
15
beginning with the day on which the individual becomes entitled to it
(assuming that it remains payable throughout that period at the rate at
which it is payable on that day).
      (2)
If the amount of the pension which will be payable will or may be reduced
so as to reflect the amount of any tax under section 211 to be paid by the
20
scheme administrator, that reduction is to be left out of account in
determining the amount of the pension which will be payable for the
purposes of sub-paragraph (1).
Benefit crystallisation event 3: excepted circumstances
10
For the purposes of benefit crystallisation event 3 “excepted circumstances”
25
means—
(a)
that there are at least 50 pensioner members of the pension scheme
concerned, and
(b)
that the increased rate applies to all the scheme pensions being paid
to all of the pensioner members under the pension scheme.
30
Benefit crystallisation event 3: rate at which pension last paid
11    (1)
This paragraph applies for the purposes of benefit crystallisation event 3 if
the rate at which a pension was previously paid reflects any increase which
has taken effect during the period of 12 months ending with the day on
which the individual becomes entitled to payment of the pension at the new
35
rate.
      (2)
The rate at which the pension was previously paid is to be treated as being
that at which it would have been paid apart from the increase.
Benefit crystallisation event 3: permitted margin
12    (1)
This paragraph applies for the purposes of benefit crystallisation event 3 if
40
the individual became entitled to the pension on or after 6th April 2006.

Finance Bill
Schedule 32 — Registered pension schemes: benefit crystallisation events—supplementary
473

      (2)
The permitted margin is the amount by which the annual amount of the
pension at its previous rate would be greater if it had been increased by
whichever of calculation A and calculation B gives the greater amount.
      (3)
Calculation A involves increasing that annual amount at the relevant annual
percentage rate for the whole of the period—
5
(a)
beginning with the month in which the pension was first payable at
the previous rate, and
(b)
ending with the month in which the individual becomes entitled to
payment of the pension at the increased rate.
      (4)
The relevant annual percentage rate is—
10
(a)
in a case where the pension is paid under a pension scheme, or an
arrangement under a pension scheme, in relation to which the
relevant valuation factor is a number greater than 20, the annual rate
agreed by the Inland Revenue and the scheme administrator, and
(b)
otherwise, 5% per annum.
15
      (5)
Calculation B involves increasing that annual amount by the relevant
indexation percentage.
      (6)
If the retail prices index for the month in which the individual becomes
entitled to payment of the pension at the increased rate is higher than it was
for the first month in which the pension was payable at the previous rate, the
20
relevant indexation percentage is the percentage increase in the retail prices
index.
      (7)
If it is not, the relevant indexation percentage is 0%.
13    (1)
This paragraph applies for the purposes of benefit crystallisation event 3 if
the individual became entitled to the pension before 6th April 2006.
25
      (2)
The permitted margin is the greater of—
(a)
what would be the permitted margin at that time if the individual
had become entitled to the pension on or after that date (see
paragraph 12), and
(b)
the amount by which the annual amount of the pension at its
30
previous rate would be greater if it had been increased for the whole
of the period specified in sub-paragraph (3) of that paragraph at the
rate of P% per annum.
      (3)
“P%” is the percentage by which, in accordance with the rules of the pension
scheme immediately before 6th April 2006, the annual rate of the pension is
35
to be increased each year.
Benefit crystallisation event 3: meaning of “XP”
14
For the purposes of benefit crystallisation event 3 XP is the amount by which
the increased annual rate of the pension exceeds the previous annual rate as
increased by the permitted margin.
40
Benefit crystallisation event 5: meaning of “DP” and “DSLS”
15    (1)
For the purposes of benefit crystallisation event 5 “DP” is the annual rate of
the scheme pension to which the individual would be entitled if, on the date
on which the individual reaches 75, the individual acquired an actual (rather
than a prospective) right to receive it.
45

Finance Bill
Schedule 33 — Pension schemes etc: minor and consequential amendments
474

      (2)
For the purposes of benefit crystallisation event 5 “DSLS” is the amount of
any lump sum to which the individual would be entitled (otherwise than by
way of commutation of pension) if, on that date, the individual acquired an
actual (rather than a prospective) right to receive it.
Benefit crystallisation event 6: meaning of “relevant lump sum”
5
16
For the purposes of benefit crystallisation event 6 a lump sum is a relevant
lump sum if it is—
(a)
a pension commencement lump sum,
(b)
a serious ill-health lump sum, or
(c)
a lifetime allowance excess lump sum.
10
Benefit crystallisation event 7: meaning of “relevant lump sum death benefit”
17
For the purposes of benefit crystallisation event 7 a lump sum death benefit
is a relevant lump sum death benefit if it is—
(a)
a defined benefits lump sum death benefit, or
(b)
an uncrystallised funds lump sum death benefit.
15
Schedule 33
Section 275

Pension schemes etc: minor and consequential amendments
Taxes Management Act 1970 (c. 9)
1
In section 9(1A) of the Taxes Management Act 1970 (tax not to be assessed
by a self-assessment), for the words after “any tax” substitute “which—
20
(a)
is chargeable on the scheme administrator of a registered
pension scheme under Part 4 of the Finance Act 2004, or
(b)
is chargeable on the person who is (or persons who are) the
responsible person in relation to an employer-financed
retirement benefits scheme under section 394(2) of ITEPA
25
2003.”
Income and Corporation Taxes Act 1988 (c. 1)
2
The Income and Corporation Taxes Act 1988 (c. 1) is amended as follows.
3
In section 21A(2) (Schedule A: computation of amount chargeable), insert at
the end—
30

“sections 192 to 196 of the Finance Act 2004 (registered pension
schemes);

section 240 of that Act (employer-financed retirement benefits
schemes).”
4
In section 56(3)(b) (transfers in deposits and debts: exemption for pensions),
35
for “592(2), 613, 614(1) to (3) or 620(6)” substitute “613(4) or 614(2) or (3) or
section 182 of the Finance Act 2004”.
5
In section 127(3)(a) (enterprise allowance), for “623(2)(c) or 833(4)(c)”
substitute “833(4)(c) or section 185(2)(b) of the Finance Act 2004”.

Finance Bill
Schedule 33 — Pension schemes etc: minor and consequential amendments
475

6
In section 129B(2) (stock lending fees), for “sections 592(2), 608(2)(a), 613(4),
614(3), 620(6) and 643(2)” substitute “sections 613(4) and 614(3) and section
182 of the Finance Act 2004”.
7
In section 227(8)(a) (purchase of own shares: rules about trustees not to
apply where shares held under exempt approved scheme), for “an exempt
5
approved scheme as defined in Chapter 1 of Part 14” substitute “a registered
pension scheme”.
8
In section 265(3)(c) (transfer of blind person’s allowance to spouse where
allowance exceeds what is left of total income after deductions: deductions
to be disregarded), for “593(2) or 639(3)” substitute “188 of the Finance Act
10
2004”.
9
In section 266(1) (life assurance premiums), for “sections 274 and 619(6) and
Schedules 14 and 15,” substitute “section 274 and Schedules 14 and 15 and
sections 188 to 190 of the Finance Act 2004,”.
10    (1)
Section 266A (life assurance premiums paid by employer) is amended as
15
follows.
      (2)
In subsection (1), for “a non-approved” substitute “an employer-financed”.
      (3)
For subsections (3) to (6) substitute—
“(3)
For the purposes of subsection (1)(a) benefits are provided in respect
of an employee if they are provided for the employee’s spouse,
20
widow or widower, children, dependants or personal
representatives.
(4)
If a sum within subsection (1) is paid with a view to the provision of
benefits for or in respect of more than one employee of the employer,
part of it is to be treated as paid for or in respect of each of them.
25
(5)
The amount treated as paid for or in respect of each employee is—

where—

A is the sum paid,

B is the amount which would have had to be paid to secure the
benefits to be provided for or in respect of the employee in
30
question, and

C is the total amount which would have had to be paid to secure
the benefits to be provided for or in respect of all the
employees if separate payments had been made in the case of
each of them.
35
(6)
This section does not apply if—
(a)
in the year of assessment in which the sum is paid the
earnings from the employee’s employment are (or, if there
are none, would be if there were any) earnings charged on
remittance, or
40
(b)
the employee is not domiciled in the United Kingdom in the
tax year in which the sum is paid and the conditions in
subsection (7) are met.
(7)
Those conditions are—
(a)
that the employment is with a foreign employer, and
45