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The Actuary The magazine of the Institute & Faculty of Actuaries

From the world of pensions

Pensions tax regime: further consultation

The Inland Revenue has issued its second consultation paper on the simplified pensions tax regime. The document confirms the overall structure of the new tax regime outlined in the 2002 consultation paper, though with some modifications. It also adds further detail in many key areas. Key points are set out below.

  • The proposed lifetime limit on tax-approved pension savings is confirmed as £1.4 million, indexed in line with prices. However, its impact is being reviewed by the National Audit Office – due to report in time for the 2004 Budget. If the impact is much greater than expected, the new tax regime may not be implemented.
  • There will be a single conversion factor – 20:1 at all ages – for valuing defined benefits against the limit.
  • The annual limit on tax relievable contributions/accrual is confirmed as £200,000, indexed in line with prices. There will be some relaxations, eg in the year of retirement.
  • The proposed recovery charge on funds over the lifetime limit is confirmed as 25%, with income from the excess taxed at marginal rate (giving an effective rate of 55% after higher rate income tax). The excess may be taken entirely in lump sum form.
  • Transitional protection for rights accrued before A-day is being strengthened.
  • There is much more detail on FURBS and UURBS.

Venables case – House of Lords judgment

The House of Lords in December 2003 gave its judgment on the latest (and final!) appeal in the Venables early retirement case.To recap, Mr Venables gave up his executive directorship, drew early retirement benefits, but continued as an unpaid non-executive director. The Inland Revenue challenged this on the grounds that Mr Venables had not actually retired. This view was upheld in the Court of Appeal on the grounds that retirement, under the terms of the legislation, requires a cessation of employment, not a change in the nature of the employee’s service; the court construed this situation as the latter.

However, the case was further appealed to the House of Lords. The Lords have allowed the appeal (ie found in favour of Mr Venables). Their reasoning includes the principle that ‘it does not follow… that an employee who is also a director must retire from both his employment and his office as director before he can be said to “retire” within the meaning of the trust deed.’ Also, ‘The fact that the taxpayer has remained in his non-pensionable occupation as a non-executive director cannot affect his right to benefit on retiring from his only pensionable occupation. But it would make no difference if he had received and continued to receive director’s fees. He would still have retired from his pensionable occupation as an employee, though benefit would have to be calculated without reference to his director’s fees.’

Although this ruling will generally make it harder for the Inland Revenue to tax lump sum retirement benefits in some early retirement cases, it does not by any means have a sweeping effect. Much hinged on the particulars of Mr Venables’s own circumstances – not least that he was seen as being simultaneously an employee and a director prior to drawing benefits – and the particular trust deed and rules.

DWP report: changes in keeping with the Myners principles

The Department for Work and Pensions has published a report looking at the extent to which 14 occupational pension schemes have voluntarily changed their investment practices and procedures in keeping with the Myners principles.

The research is the first part of a two-stage programme designed to assess the effectiveness of the Myners principles in bringing about change in pension scheme fund investment decision-making. Results from the second stage, a large-scale quantitative survey, will be published in spring 2004.

For more information from the report see www.the-actuary.org.uk.

Pensions Update 145 – no more paper Updates

Inland Revenue Savings, Pensions and Share Schemes has issued Update 145. The sole purpose of this is to notify that it will not be issuing future Updates on paper!

The Updates are available on the Inland Revenue website at www.inlandrevenue.gov.uk /pensionschemes/updates.htm.

Outlawing disability discrimination

Regulations were made in July 2003 which come into force on 1 October 2004 and outlaw discrimination and harassment by employers in the provision of occupational pensions, but do not impose any requirements on trustees.

After further thought, the government has decided that occupational pension scheme trustees must make ‘reasonable adjustments’ where to do otherwise could result in indirect discrimination. So in November the Disability Discrimination Act 1995 (Pensions) Regulations 2003 were made, also coming into force on 1 October 2004, which:

  • prohibit trustees from discriminating against or harassing a disabled person. Schemes will be treated as though they had an overriding non-discrimination rule giving trustees power to make necessary amendments to scheme rules where they otherwise do not have the power. The non-discrimination rule applies only to benefits that will accrue after 1 October 2004 (though this restriction does not apply to the provision of information about benefits accrued before this date);
  • require trustees to make reasonable adjustments where a provision, criteria or practice, including a scheme rule or any physical feature of premises occupied by the trustees, places a disabled person at a substantial disadvantage compared to someone who is not disabled; and
  • allow claims against the trustees to be brought before an employment tribunal by an active or deferred scheme member in addition to the existing route of complaint to the pensions ombudsman.

    It is clearly going to be important, but not necessarily easy, to distinguish disability for the purposes of the non-discrimination requirements from general ill-health and incapacity.

    Opra publishes Bulletin 29

    The contents of Bulletin 29 include

    • whistleblowing gets the green light – a look at Opra’s revised guidelines for statutory whistleblowers;
    • a word from the Auditing Practices Board – Richard Fleck, APB chairman, considers the new Opra Note 1;
    • red, green, or amber…? – case studies from Opra’s whistleblowing workshops;
    • it’s criminal – Opra’s first prosecution for fraudulent evasion.

    Visit the Opra website to read more, at www.opra.gov.uk.