The impact of the 2007 Budget on occupational pension schemes

United Kingdom

In what is expected to be his last Budget as Chancellor, Gordon Brown has confirmed a number of provisions of interest to occupational pension schemes.

Financial Assistance Scheme

The Financial Assistance Scheme (FAS) will be extended so that the estimated 125,000 affected members of pension schemes will all receive 80% of their “core pension rights”. In addition, the maximum pension level available per person will be increased to £26,000, with previous de minimis exclusions being removed. In order to achieve this, Government spending on FAS is projected to rise from £2bn to £8bn.

It is not yet clear precisely how the sums will be applied, but the Budget announces a review to examine “making best use of assets within these schemes”. This is expected to report later in 2007.

Tax avoidance?

The Budget has also, as widely anticipated, sought to restrict tax reliefs available in two specific scenarios where the Treasury takes the view that the member’s objective is something other than an “income in retirement”:

  • the restrictions governing the payment of ASPs (“alternatively secured pensions”) are to be further tightened so that a minimum income will have to be drawn, and a tax charge imposed where funds remaining on the member’s death are transferred to the pension funds of other scheme members;
  • the Government will no longer allow tax relief on contributions made by individuals which are used to fund personal term assurance policies.

There is a real theme in the Budget Report of perceived abuse of the Finance Act regime: in addition to these interventions, the Government says that it will be consulting further on measures “to prevent the inheritance of tax-relieved savings”. It is also giving itself new powers to pass secondary legislation where required in order to remove tax relief from any “new products” that are “sold with a view to avoiding the new restrictions on tax relief”.

Finance Act 2004

A number of technical changes to existing Finance Act 2004 provisions, previously flagged in the Government’s Pre-Budget Report, have also been confirmed. The Government says that these are designed to ensure that the pensions tax rules continue to meet the original intentions of the simplified tax regime, and to reduce industry costs in administering the new rules:

  • the length of time allowed to scheme administrators to pay a PCLS (“pension commencement lump sum”) will be increased from 3 to 12 months of the member becoming entitled to the related pension, and even where this period extends beyond the member’s 75th birthday;
  • the period during which a lump sum death benefit may be paid will now be up to 2 years from the scheme being notified of the member’s death (or from the earlier date on which the scheme “should have reasonably been aware” of the member’s death);
  • ill-health pensions may now be reduced on review, although a further amendment will ensure that such reduction still cannot be made where it might form part of “avoidance arrangements”;
  • relaxation of the rules allowing transfers between schemes so that they do not result in affected members losing their rights to an enhanced lifetime allowance – the relaxation will now extend to partial transfers by individuals, transfers to new occupational death-in-service arrangements and bulk transfers of employees on the sale of a business.

The full Budget report and related documents are available from the Treasury website.