Finance Bill

House of Commons

Session 2002 - 03
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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
490

be drawn down by the individual as income in accordance with the pension
scheme or contract concerned.
      (5)
In the case of a right which is a relevant existing pension by virtue of sub-
paragraph (2)(h), the annual rate at which the pension is payable on 5th
April 2006 is the maximum amount of income withdrawals that may be
5
made by the individual in the period of 12 months referred to in section
634A(4) of ICTA during which 5th April 2006 falls.
11    (1)
This paragraph applies where—
(a)
paragraph 7 makes provision for the operation of a lifetime
allowance enhancement factor in relation to an individual, and
10
(b)
on or after 6th April 2006, the rights of the individual under a
relevant pension arrangement (see paragraph 8(2)) relating to the
individual are reduced by becoming subject to a pension debit.
      (2)
The primary protection factor (see paragraph 7(3)) is to be recalculated.
      (3)
The recalculation involves reducing RR (see paragraph 7(3)) by the amount
15
by which the individual’s rights are reduced and arriving at a revised
primary protection factor.
      (4)
The revised primary protection factor operates in relation to any benefit
crystallisation event occurring in relation to the individual after the time
when the individual’s rights are reduced by becoming subject to the pension
20
debit.
“Enhanced protection”
12    (1)
This paragraph applies on and after 6th April 2006 in the case of an
individual who has one or more relevant existing arrangements if notice of
intention to rely on it is given to the Inland Revenue in accordance with
25
regulations made by the Board of Inland Revenue.
      (2)
But this paragraph ceases to apply if—
(a)
relevant benefit accrual occurs under the arrangement, or any of the
arrangements (see paragraph 13),
(b)
a transfer of sums or assets held for the purposes of, or representing
30
accrued rights under, the arrangement or any of the arrangements is
made that is not a permitted transfer, or
(c)
an arrangement relating to the individual is made under a registered
pension scheme otherwise than solely for the purposes of a
permitted transfer.
35
      (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—
(a)
before 6th April 2006 an arrangement relating to the individual has
been made under a pension scheme within paragraph 1(1), and
40
(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
may not be given in a case where—
(a)
the value of the uncrystallised rights of the individual on 5th April
45
2006 under an arrangement, or
(b)
the aggregate of the values of the uncrystallised rights of the
individual on 5th April 2006 under arrangements,

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
491


is arrived at in accordance with paragraph 9 unless such rights as, in
accordance with regulations made by the Board of Inland Revenue, are to be
treated as representing the relevant excess have been surrendered.
      (6)
In sub-paragraph (5) “the relevant excess” means the amount by which the
value of—
5
(a)
the individual’s uncrystallised rights, or
(b)
the aggregate of the values of the individual’s uncrystallised rights,

(as arrived at in accordance with paragraph 9) exceeds what it would be if
arrived at under paragraph 8.
      (7)
For the purposes of this paragraph and paragraphs 13 and 15, a transfer of
10
sums or assets held for the purposes of, or representing accrued rights
under, an arrangement is a permitted transfer if—
(a)
all sums and assets held for the purposes of, or representing rights
under, the arrangements relating to the individual under the pension
scheme under which the arrangement is made are transferred by the
15
transfer,
(b)
the sums or assets held for the purposes of, or representing accrued
rights under, the arrangement are transferred so that sub-paragraph
(8) applies in relation to them, and
(c)
the aggregate of the amount of those sums and the market value of
20
those assets is, applying normal actuarial practice, equivalent before
and after the transfer.
      (8)
This sub-paragraph applies in relation to sums or assets held for the
purposes of, or representing accrued rights under, the arrangement if—
(a)
they are transferred so as to become held for the purposes of a money
25
purchase arrangement that is not a cash balance arrangement, or two
or more money purchase arrangements that are not cash balance
arrangements, under a registered pension scheme or recognised
overseas pension scheme, or
(b)
where the transfer occurs in connection with the winding up of the
30
pension scheme under which the arrangement is made and the
arrangement is a cash balance arrangement or a defined benefits
arrangement, they are transferred so as to become held for the
purposes of, or to represent rights under, a cash balance arrangement
or defined benefits arrangement relating to the same employment as
35
the arrangement and made under a registered pension scheme or
recognised overseas pension scheme.
      (9)
Where there is a permitted transfer—
(a)
if the transfer is a permitted transfer by virtue of sub-paragraph
(8)(a), this paragraph (and paragraphs 13 and 14) apply in relation to
40
the arrangement, or each of the arrangements, to which the transfer
is made, and
(b)
if the transfer is a permitted transfer by virtue of sub-paragraph
(8)(b), this paragraph (and paragraphs 13 and 15) apply as if the
arrangement to which the transfer is made were the same as that
45
from which it is made.
13
Relevant benefit accrual occurs in relation to an individual under an
arrangement—
(a)
in the case of a money purchase arrangement that is not a cash
balance arrangement, if a relevant contribution is paid under the
50
arrangement (see paragraph 14), and

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
492

(b)
in the case of a cash balance arrangement or defined benefits
arrangement, if, when a benefit crystallisation event or transfer that
is a permitted transfer by virtue of paragraph 12(8)(a) (a “relevant
event”) occurs in relation to the individual and the arrangement, the
relevant crystallised amount exceeds the appropriate limit (see
5
paragraph 15).
14    (1)
For the purposes of paragraph 13(1)(a) a relevant contribution is paid under
the arrangement if—
(a)
a relievable pension contribution is paid by or on behalf of the
individual under the arrangement,
10
(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
purposes of the provision under the arrangement of benefits to or in
15
respect of the individual.
      (2)
But the following are not relevant contributions for the purposes of
paragraph 13(1)(a)—
(a)
contributions which may be applied only for the provision of
benefits in respect of the individual after the individual’s death, and
20
(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.
15    (1)
For the purposes of paragraph 13(1)(b) “the relevant crystallised amount”
25
is—
(a)
if the relevant event is the first relevant event occurring in relation to
the individual and to the arrangement or any other cash balance
arrangement or defined benefits arrangement related to the
arrangement (“the first relevant event”), the amount crystallised by
30
that event, and
(b)
otherwise, the aggregate of the amount crystallised by the relevant
event and the amount crystallised by the relevant event, or by each
of the relevant events, which has or have previously occurred in
relation to the individual and to the arrangement or any other cash
35
balance arrangement or defined benefits arrangement related to the
arrangement.
      (2)
If the relevant event is a permitted transfer which is not a benefit
crystallisation event, sub-paragraph (1) applies as if the amount crystallised
by the event were the aggregate of—
40
(a)
the amount of any sums held for the purposes of, or representing
accrued rights under, the arrangement, and
(b)
the market value of any assets held for the purposes of, or
representing accrued rights under, the arrangement.
      (3)
For the purposes of this paragraph (and paragraph 16) another arrangement
45
is related to the arrangement if—
(a)
the other arrangement relates to the individual, and
(b)
both the arrangement and the other arrangement relate to the same
employment;

and whether an arrangement relates to an employment is to be determined
50
in accordance with paragraph 9(6).

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
493

      (4)
For the purposes of paragraph 13(1)(b) “the appropriate limit”, in relation to
a relevant event, is the greater of—
(a)
the value of the individual’s rights on 5th April 2006 under the
arrangement, or (where there is or are one or more other cash balance
arrangements or defined benefits arrangements related to the
5
arrangement) the aggregate of the value of the individual’s rights
under the arrangement and the other arrangement or arrangements,
arrived at in accordance with paragraphs 8 and 9, as increased by the
relevant indexation percentage (see sub-paragraph (5)), and
(b)
what would be the value of those rights, so arrived at, on the
10
assumptions specified in sub-paragraph (6).
      (5)
For the purposes of sub-paragraph (4)(a) “the relevant indexation
percentage”, in relation to a relevant event, means whichever is the greatest
of—
(a)
the percentage by which an amount would be increased if it were
15
increased for the period beginning with 6th April 2006 and ending
with the date on which the relevant event occurs at an annual rate of
5%,
(b)
the percentage by which an amount would be increased if it were
increased for that period at an annual percentage rate referred to in
20
regulations made by the Board of Inland Revenue, and
(c)
the percentage by which the retail prices index for the month in
which the relevant event occurs is higher than that for April 2006.
      (6)
The assumptions referred to in sub-paragraph (4)(b) are—
(a)
that the individual’s age on 5th April 2006 were what it is at the time
25
of the first relevant event (so that neither paragraph 8(6) nor section
271(a) applies in arriving at what would be the value of the rights
under paragraph 8), and
(b)
that the amount of the earnings which would have fallen to be taken
into account under the arrangement for calculating the amount of
30
benefits payable to or in respect of the individual (if the individual
became entitled to the present payment of benefits in respect of the
rights under the arrangement on that date) were the lesser of the two
amounts specified in sub-paragraph (7).
      (7)
The amounts referred to in sub-paragraph (6)(b) are—
35
(a)
the current amount of the relevant pensionable earnings
immediately before the first relevant event, and
(b)
the post-commencement earnings limit (see paragraphs 15 and 16).
      (8)
But sub-paragraph (6)(b) applies in relation to an arrangement under a
pension scheme within paragraph 1(1)(c) or (e) as if for “the lesser of the two
40
amounts specified in sub-paragraph (7)” there were substituted “the amount
specified in sub-paragraph (7)(a)”.
      (9)
In this paragraph “the relevant pensionable earnings” means the description
of earnings (or the portion of the description of earnings) of the individual
by reference to which the amount of benefits payable to or in respect of the
45
individual would have fallen to be calculated if the individual became
entitled to the present payment of benefits in respect of the rights under the
arrangement on 5th April 2006.
     (10)
For the purposes of sub-paragraph (7)(a) “the current amount” of the
relevant pensionable earnings immediately before the first relevant event is
50
the amount of the relevant pensionable earnings which, at that time, would

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
494

fall to be taken into account in calculating the amount of benefits payable to
or in respect of the individual under the arrangement if the individual
became entitled to the present payment of benefits at that time (but subject
to sub-paragraph (11)).
     (11)
If at that time the individual is absent from work in connection with
5
pregnancy, maternity, paternity or adoption, the current amount of the
relevant pensionable earnings at that time includes what would be likely to
be included in that amount if the individual were not so absent.
16    (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
10
of ICTA (earnings cap) had effect in relation to any pension scheme under
which the arrangement or any other arrangement related to the arrangement
was made.
      (2)
The post-commencement earnings limit is the lesser of amount A and
amount B.
15
      (3)
Amount A is 7.5% of the standard lifetime allowance when the first relevant
event occurs.
      (4)
Amount B is the amount of the individual’s employment income from the
employment to which the arrangement relates for the best period of 12
months during the appropriate three year period.
20
      (5)
The appropriate three year period is the period of three years ending with
the time when the first relevant event occurs.
      (6)
A period of 12 months during the appropriate three year period is the best
period of 12 months during the appropriate three year period if the amount
of the individual’s employment income from the employment to which the
25
arrangement relates is greater for that period of 12 months than for any other
period of 12 months during the appropriate three year period.
      (7)
For the purposes of this paragraph and paragraph 17 the amount of the
individual’s employment income includes, in relation to any time when the
individual is absent from work in connection with pregnancy, maternity,
30
paternity or adoption, what would be likely to be included in that amount if
the individual were not so absent.
17    (1)
This paragraph specifies the post-commencement earnings limit in any
other case.
      (2)
The post-commencement earnings limit is—
35
(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 16.
      (4)
Amount C is the greater of—
(a)
amount A, and
40
(b)
amount D.
      (5)
Amount D is—

where ETY is the amount of the individual’s employment income from the
employment to which the arrangement relates for the appropriate three year
period (within the meaning of paragraph 16).
45

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 2 — Pre-commencement rights: lifetime allowance charge
495

Pre-commencement pension credits
18    (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
acquired rights under a pension scheme within paragraph 1(1) by virtue of
5
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—

where—
10
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
SLA is £1,500,000 (the standard lifetime allowance for the tax year
15
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
(primary protection) applies in relation to the individual.
20
      (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
19    (1)
This paragraph applies where a benefit crystallisation event occurs in
25
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
reduced by the relevant percentage.
30
      (3)
A benefit crystallisation event occurs in protected circumstances if—
(a)
paragraph 22 or 23 (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 22(4) or 23(4))
is less than 50, and
35
(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
the benefit crystallisation event occurs and the date on which the individual
40
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

Finance Bill
Schedule 34 — Pension schemes etc: transitional provisions and savings
Part 3 — Pre-commencement benefit rights
496

paragraph has had effect, another benefit crystallisation event occurs in
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 215 (availability of
5
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
20    (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
10
relevant existing pensions.
      (2)
Section 215 (availability of individual’s lifetime allowance) applies as if,
immediately before the first benefit crystallisation event occurring in
relation to the individual—
(a)
a benefit crystallisation event had occurred in relation to the
15
individual, and
(b)
the amount crystallised was the value of the 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
20
is—

where (subject to sub-paragraph (4)) ARP is an amount equal to—
(a)
the annual rate at which the relevant existing pension is payable to
the individual at that time, or
(b)
if more than one relevant existing pension is payable to the
25
individual at that time, 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
maximum amount that may be paid in the unsecured pension year or
alternatively secured pension year in which the time falls in accordance with
30
pension rule 5 or pension rule 7 (see section 162).
      (5)
In this paragraph “relevant existing pension” has the same meaning as in
paragraph 10(2); and paragraph 10(4) and (5) operates for the purposes of
this paragraph for determining the annual rate at which a relevant existing
pension is payable at any time (treating the references there to 5th April 2006
35
as to that time).
Part 3
Pre-commencement benefit rights
Rights to take pension before normal minimum pension age
21    (1)
If paragraph 22 or 23 applies in relation to a registered pension scheme and
40
a member of the pension scheme, this Part of this Act (except for section
214(6) and paragraph 19) 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.