Budget Notes

BN42 PENSIONS: REGULATION MAKING POWERS

Who is likely to be affected?

1. Pension scheme administrators, members of registered pension schemes and their dependants.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to provide for existing regulation making powers to be amended to:

•    allow certain payments from pensions schemes to be taxed in the same way as other authorised payments made by pension schemes instead of as unauthorised payments; and

•    simplify the administration of certain trivial commutation payments.

3. The provisions will enable regulations to define payments to be treated as authorised.

Operative date

4. This measure will have effect on and after the date that Finance Bill 2008 receives Royal Assent. However the regulations made under this power may have retrospective effect where this will not disadvantage anyone affected.

Current law and proposed revisions

5. The simplified tax regime for registered pension schemes was introduced in Finance Act 2004 and has effect on and after 6 April 2006. The Act lists what payments a registered pension scheme is authorised to make to a member of a scheme. All other payments to a member are unauthorised and taxable at a rate of up to 70 per cent of the payment.

6. Regulations can be made to deem certain payments to be authorised but not to provide for their taxation treatment. This means some payments covered will not be chargeable to income tax at all.

7. Finance Bill 2008 will provide for changes to the existing power to enable these payments to be taxed in the same way as other authorised payments made by a registered pension scheme. Provision will also enable retrospective treatment where this will not disadvantage anyone affected.

8. Additionally, some easements will be made to the rules for 'trivial commutation' - the circumstances in which pension rights giving rise to very small pension entitlements can be commuted into a lump sum up to 25 per cent of which would be tax free. Regulations under the widened power set out above will provide that it will be possible to commute some small 'stranded pots' as well as pension savings below £2,000 in occupational pension schemes. These will have effect in addition to the current rule that restricts the aggregate of an individual's pension savings to £16,000 for trivial commutation.

Further advice

9. If you have any questions about these changes, please contact Pensions Helpline on 0845 600 2622. Information about Budget measures is available on the HM Revenue & Customs website at HM Revenue & Customs website at www.hmrc.gov.uk