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The brighter points of the UK pension scheme tax regime
Rachel Evans from Barnett Waddingham's Amersham office reports on the hoped-for simplification of Inland Revenue rules.
The tax regime for UK defined benefit pension schemes is being subjected to an overhaul by Inland Revenue Savings Pensions & Share Schemes ("IRSPSS"). The establishment of the review team was announced by Melanie Johnson, Economic Secretary to the Treasury in March 2001.
The review team
The IRSPSS Savings & Pensions Policy and Pensions Schemes Technical Advice units are working with representatives from each of the NAPF, ABI, APL and ACA to review the effectiveness and efficiency of everything from Chapter I Part XIV of the Income and Corporation Taxes Act 1988 right through to the myriad regulations that clutter up the pensions system.
Industry burden
The review team are looking at lifting some or all of the burden imposed on pension schemes by IRSPSS and one of their aims is to achieve this on a cost neutral basis. Into the cost neutral equation will go not only potential lost tax revenue, but also potential administrative savings by employers.
Top topics under scrutiny include the rules and regulations surrounding retained benefits, final remuneration, AVCs - and even the famed IR12 Practice Notes themselves.
The project is still at an early stage and, although the timetable is very much dependent on the government, implementation during 2003 is still a possibility.
How you can help
So, what have IRSPSS got to lose? It's been claimed for many years that only 1% of people are claiming maximum tax relief under defined benefit pension schemes. If this is true, then there is considerable scope for simplification. One of the first tasks facing the review team is to prove or disprove this claim. To achieve this, they are asking a sample of ABI and NAPF members to participate in a survey. If one of these surveys pops through your letterbox, please be sure to respond - the future of defined benefit pension scheme administration and benefits depends on you.
IRSPSS's Update No 107 gives a bit of a rap on the knuckles for those in the pensions industry who misunderstand the work of IRSPSS. The update highlights areas where there is no need to consult IRSPSS (e.g. on changes of normal retirement date, which is adequately covered by paragraphs 6.11 and 6.15 of the Practice Notes) and areas where model rules are misunderstood (e.g. the phrase "or such greater amount as will not prejudice the approval of the scheme" does not mean that benefits exceeding the Inland Revenue maximum can be paid).
More good tax news for pension schemes
Chancellor of the Exchequer Gordon Brown and US Treasury Secretary Paul O'Neill signed a new double taxation treaty in London on 24 July 2001 to replace that signed in 1975. The treaty will come into force some time early in 2002 after being ratified by the US Senate and UK Parliament.
Broadly and briefly:
- Article 10 of the treaty removes withholding tax on US dividends received by UK pension schemes.
- Article 17 provides that pensions and lump sums that are tax-free in the state in which they arise will be tax-free in the state in which the recipient is resident.
- Article 18 facilitates continued membership of their original country pension scheme by secondees to the other country.
Rachel Evans, October 2001.