Budget Notes


Who is likely to be affected?

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

General description of the measure

2. Draft legislation was published alongside the 2007 Pre-Budget Report (PBR), together with PBR Note 14, setting out changes to simplify the way the pension tax rules operate when testing pension increases against the lifetime allowance.

3. Legislation will be included in Finance Bill 2008 to provide:

•    an exemption from the lifetime allowance test for small annual increases in pensions, and rounding; and

•    greater flexibility in the choice of the Retail Price Index (RPI) reference month including pension increases awarded within the first year of the pension commencing.

Operative date

4. The amendments for small annual increases in pensions and rounding will be backdated to have effect on and after 6 April 2006 (A Day). The change to the RPI reference month will have effect on and after 6 April 2008.

Current law and proposed revisions

5. The tax rules for pension savings are set out in Part 4 of Finance Act 2004.

6. Three small changes will be made to the draft legislation published at 2007 PBR following representations. These will provide further easements to the rules for how the lifetime allowance test benefit crystallisation event 3 (BCE3) operates for pension increases, whilst maintaining the integrity of the test:

•    A change to allow pension increases of £250 per annum or less to be exempt from the BCE3 test;

•    A provision for rounding so that once the pension increase has been awarded (irrespective of the size of increase or whether it is paid monthly or weekly) it can be increased to the nearest whole number without the need for a further test; and

•    A change to the RPI reference month to allow schemes to use the figure for RPI for any month which is within 12 months before the increase in pension.

Further advice

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