Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN19 Changes to alternatively secured pension rules and consultation on inheriting tax-relieved pension savings

Who is likely to be affected?

1   Members of registered pension schemes, their dependants and beneficiaries, scheme administrators, insurance companies and financial advisers.

General description of the measure

2   Legislation will be included in Finance Bill 2007 to tighten up the provisions for the operation of members' and dependants' alternatively secured pension (ASP) funds. This includes the introduction of a requirement to draw a minimum income from an ASP fund and a tax charge where ASP funds remaining on the death of a member are transferred to the pension funds of other members in the scheme. The Finance Bill measures will also include provisions for schemes with members with money purchase arrangements that they have been unable to trace by age 75.

Operative date

3   The measures to be included in Finance Bill 2007 will have effect on and after 6 April 2007. The unauthorised payment charges to be introduced on the transfers of funds to other members of the scheme on the death of the ASP member (i.e. the removal of the transfer lump sum death benefit facility) will not have effect where the member or dependant died on or before 5 April 2007. This is a change from the draft legislation published at Pre-Budget Report, which disapplied the changes where the member died on or before 6 December 2006.

Current law and proposed revisions

4   Finance Bill 2007 will include legislation to implement the proposals on ASP set out in PBRN 13, subject to the following additions and changes.

Alternatively secured pension changes

Pension tax rules

5   For providers that have been using the ASP measures as a means to hold in suspense the funds of members that they have been unable to trace by age 75, alternative provisions will be included in Finance Bill 2007. Schemes will need to take reasonable steps to trace a member. Providing schemes do not know the whereabouts of the member, then the funds, (which through the operation of paragraph 8(2) of Schedule 28 to Finance Act 2004 are deemed to be designated into unsecured pension) will on their 75 th birthday effectively become held in suspense, and will not become ASP funds.

6   There will be no requirement to operate a minimum income on these pension arrangements, while the member can't be traced. But where members are subsequently traced then the member will have the choices available at age 75, and if they don't make a decision within 6 months of being traced then the minimum income requirement will start to apply. Where the pension scheme becomes aware that the member has died (after age 75), then the remaining funds can be paid to charity or as a pension for a financial dependant, without attracting unauthorised payment or inheritance tax charges. If the fund is in those circumstances reallocated to the pension pots of other members then there will be an unauthorised payment charge. More details about how IHT will apply are set out below.

7   For schemes with members over the age of 75 where the pension pots are currently held under the ASP provisions because they have been unable to trace the member, they will on and after 6 April 2007 cease to be held as ASP funds and instead be held under the separate provisions for untraced members. This will be subject to the scheme having taken reasonable steps to trace the member.

8   In response to representations made in the consultation process the level of the minimum income for an ASP will be set at 55% of the annual amount of a comparable annuity (for a 75 year old).

9   Section 268(6) FA 2004 will also be amended to ensure, for example, that the scheme sanction charge may be discharged where it would not be just and reasonable to apply it in certain circumstances where there has been a failure to operate the minimum income requirement.

Inheritance tax (IHT) rules

10 Associated changes will be made to the ASP provisions in sections 151A to 151C of the Inheritance Act 1984 (IHTA) arising from the unauthorised payments pension charges on ASP funds. The basis of the IHT charges in sections 151A and 151C will be changed so that for deaths on or after 6 April 2007, IHT will be calculated on the basis that the IHT nil-rate band will be set in priority against the estate of the deceased excluding ASP funds. And each of these sections will be further modified to introduce a special calculation for cases where there is an amount of nil-rate band available to off-set against the value of the ASP funds. How this works is explained in more detail below.

11 There is no change to the timing of the IHT charges. The amount of the ASP funds charged to IHT differs depending on whether or not the unauthorised payment charges have arisen before or after the IHT due date. Where the unauthorised payment charges have been deducted before IHT is due then IHT is calculated by reference to the net value of the ASP funds. And conversely where IHT is due before the unauthorised payment charges are made then IHT is calculated by reference to the gross value of the ASP funds with an adjustment to the unused nil-rate band to set against the ASP funds.

Interaction with the IHT nil-rate band

12 Where there is an unauthorised payment charge and an IHT charge on the ASP funds the aggregate of the two tax charges is the same in whichever order the two taxes are charged. But a special IHT provision is being made to cater for cases where a person with an ASP dies leaving property chargeable to IHT net of their ASP that is worth less than the IHT nil-rate band (300,000 on and after 6 April 2007). This will apply where the IHT charge arises before any unauthorised payment charge and provides for the amount of any unused IHT nil-rate band to be grossed up. The ASP funds will be charged to IHT on the excess over the "grossed up nil-rate band". This approach recognises that the gross ASP funds will be subject to subsequent unauthorised payment charges of up to 70 per cent.

13 The section 151B charge arises on left-over ASP funds once a relevant dependant's pension benefits cease and the rates of tax are those applying at the date of that event rather than as at the date of death of the scheme member. This rule will be modified so that if the IHT nil-rate band was not fully used when the original 'owner' of the ASP died then the same proportion that was unused will be applied to the amount of the nil–rate band in force at the date of the later event and be available against the ASP.

14 There will be no change to HMRC's present procedures for calculating and notifying scheme administrators of the IHT due on ASP funds. Moving to one basis of IHT charge as described in paragraph 10 will mean some streamlining of the existing administrative procedures for scheme administrators. HMRC will work closely with scheme administrators to ensure that the impact will be kept to a minimum.

Untraceable members: death after age 75.

15 As mentioned in paragraph 6 above those whom a scheme cannot trace at age 75 will be brought within the IHT framework. The value of the remaining funds on death of the scheme member will be treated as part of their IHT chargeable estate. Where the funds are paid as pension benefits to a relevant dependant (i.e. a spouse, civil partner or financial dependant) any IHT charge on any remaining funds on will be deferred to the date of cessation of those pension benefits. Funds paid to charity will be exempt from IHT.

16 Where there is an unauthorised payment charge on the remaining funds then the mechanics of the IHT charge will work in broadly the same way as described in paragraphs 12 – 14 above. Scheme administrators will be liable and accountable for any IHT. In these cases schemes may not be aware of the death of a scheme member until long after the event so instead of the usual IHT timing rules the scheme administrators will have six months from end of the month in which they were notified of the death to meet their accounting obligations.

Preventing inheritance of tax-privileged pension savings

17 It has been announced today that there will be a consultation on measures that will be introduced to prevent ways of inheriting tax-privileged pension savings. Further details can be found in the consultation paper 'Tax Relief for Pensions - Rules to prevent inheriting tax-privileged pension savings', which is available on the HMRC website.

Further advice

18 If you have any questions about this change, please contact the Pensions Helpline on 0115 974 1600. Information about Budget measures is available on the HM Revenue & Customs website at