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Inland Revenue Updates
Summary of Inland Revenue Updates issues between 20 December 2002 and 11 March 2003
The Audit and Pension Schemes Services Technical department of Inland Revenue Savings, Pensions and Share Schemes issued four Updates during this period. Pauline Berry from our Liverpool office gives a very broad summary of these below. Any specific queries should be addressed to your usual Barnett Waddingham contact.
The Audit and Pension Schemes Services Technical department of Inland Revenue Savings, Pensions and Share Schemes issued four Updates during this period. Pauline Berry from our Liverpool office gives a very broad summary of these below. Any specific queries should be addressed to your usual Barnett Waddingham contact.
Update 134: Changes to the Information Requirements for Retirement Benefits Schemes
This update details changes which will become effective from 6 April 2003 and which principally cover the reporting of some transfers between certain tax approved pension schemes. For several years now, all transfers to and from Small Self Administered Schemes (SSAS) have required prior approval of Inland Revenue. With effect from the date of this Update (20 December 2002) transfers of less than £250,000 in aggregate (i.e. including any transfers from a member's other arrangements) do not require prior approval. From 6 April 2003, relatively few transfers will need prior approval but all transfers above £250,000 in aggregate made within a period of 364 days must be reported to Inland Revenue using reporting form PS 7050. Purchases of immediate annuities are excluded from this requirement. As always, the Revenue reserves the right to raise queries during a fairly lengthy period following receipt of the reporting form; the deadlines follow those for Self Assessment tax returns and might mean a query is received more than 2 years after the transfer is made.
The Update also clarifies certain terms defined in the original reporting requirements and imposes a duty on scheme administrators to report tax liabilities within prescribed timescales. The Revenue intends to introduce electronic reporting although this is still some way off.
Update 135: Lump Sums
It seems that the Inland Revenue has received an increasing number of queries regarding the timing and frequency at which tax free lump sums can be paid. The Update clarifies that a tax free lump sum is payable once, at the time a pension first becomes payable. However, there are exceptions and some examples of when a second tax free lump sum may be paid are:-
- Where it is not possible at the retirement date to confirm that enough money will remain after paying the tax free lump sum to provide a member's Guaranteed Minimum Pension (GMP).
- Where the member's "Final Remuneration" cannot be determined accurately at retirement - e.g. because part of their earnings has not yet been assessed and agreed for tax liability.
- Where a scheme is winding up and the full extent of its assets and liabilities cannot be calculated accurately.
- If a Court, an Employment Tribunal or the Pensions Ombudsman order a recalculation - e.g. because the scheme benefits have not been equalised or there is reason to believe the original calculation was wrong.
- Where, following retirement, membership is backdated to account for part time service.
- Where there was a genuine and "demonstrable" error in the original calculation.
- Where rights have been reinstated following a pension mis-selling.
If the original lump sum was lower than the Revenue permitted amount, a further tax free payment may be made. Prior clearance is needed before an extra payment can be made to a Controlling Director. Lump sums representing commutation of trivial pensions (less than £260 p.a.) or arrears of pension instalments will continue to be paid net of tax. Personal pensions and buy out contracts are subject to broadly similar rules.
Update 136: Publishing Updates and Amendments
A (mercifully) short update which announces the intention to publish future Updates on the Internet. Subscriptions due on 1 April 2003 will not be collected but subscribers will continue to receive paper copies of Updates until November 2003. The Revenue's manuals will be republished every six months and guidance changes will be effective from these dates.
Update 137: Revised Maximum Funding Basis for Small Self Administered Schemes
This update attaches an updated and replacement Appendix IX to the Revenue's Practice Notes -IR12 (2001). The revised basis applies to all SSASs set up on or after 11 March 2003 and to existing SSASs at their next funding review (i.e. Actuarial Valuation) date.
Perhaps disappointingly, there is no change to the financial assumptions which the actuary must use and so SSAS funding will continue to lag behind the market cost of benefits. In fact, most of the changes announced simply clarify and expand on the calculation of the value of pension sharing orders and the concurrency provisions following the introduction of Stakeholder Pension Schemes.
There are, however, four new sections. The first deals with payment of Additional Voluntary Contributions (AVCs) and the effect of these on funding. In particular, the Appendix clarifies that AVCs can be paid to fund for early retirement benefits based on the appropriately reduced maximum benefit limits. The second section deals with retained benefits - usually but not always benefits built up during a member's previous employment. In fact, the provisions detailed were formerly contained in the transitional provisions which applied when the funding basis was introduced in 1996 but these have now been deleted and so the need to recalculate the maximum funding rate for a member who later discovers benefits from an old arrangement are now covered in this section. Similarly, the third new section announces that transfer payments received in respect of benefits not previously taken into account will trigger a recalculation of the maximum funding rate for the member affected. The fourth new section clarifies that the Appendix guidelines apply to money purchase SSASs which provide benefits below Inland Revenue maxima (i.e. those approved under Section 590 of Income and Corporation Taxes Act 1988 taking advantage of mandatory rather than discretionary approval requirements).
Pauline Berry, March 2003.