The Taxation of Pension Schemes (Transitional Provisions) Order 2006

Article 31 provides for certain individuals over the age of 75 at A day to be treated as being in alternatively secured pension from A day. Paragraphs (1) and (2) set out the conditions to be met for the modification to apply. Paragraph (3) modifies paragraph 11 of Schedule 28 (member’s alternatively secured pension fund) so that the sums and assets that meet the inserted condition C shall become member’s alternatively secured pension funds at A day. The effect of paragraphs (4), (5) and (6) is that certain individuals over the age of 75 who were already drawing a pension on 5th April 2006 will have their funds automatically converted to member’s alternatively secured pensions funds pursuant to paragraph 11 of Schedule 28. Paragraphs (4) and (5) set out the conditions that must be met for the modifications to apply. Paragraph (6) modifies paragraph 11 of Schedule 28 so that sums and assets which meet the inserted condition C shall become member’s alternatively secured pension funds.

Article 32 contains similar provisions to those in article 31 for dependant’s alternatively secured pension funds. Paragraphs (1) and (2) set out the conditions that must be met by the dependant. Paragraph (3) contains modifications to paragraph 25 of Schedule 28 (dependant’s alternatively secured pension fund) so that the sums and assets which meet the inserted condition C shall become dependant’s alternatively secured pension funds.

Article 33 deals with serious ill-health lump sums, pension protection lump sum death benefits and annuity protection lump sum death benefits. Paragraphs (1) and (2) set out the applicable conditions. Paragraph (3) modifies paragraph 4 of Schedule 29 (serious ill-health sum) to prevent an individual who already had an actual right to payment of a relevant pension at A day being paid a serious ill-health lump sum. This reflects the position in the new regime. Paragraphs (4) and (5) modify paragraphs 14 (pension protection lump sum death benefit) and 16 (annuity protection lump sum death benefit) so payments of pension protection lump sum death benefits and annuity protection lump sum death benefits can be made in respect of individuals who fall within the conditions set out in paragraphs (1) and (2). In the new regime these lump sums must not exceed a protection limit. Individuals who meet the conditions would have a limit of £0 as the limit is defined by reference to “the amount crystallised”. The concept of crystallisation is not applicable to pensions before A day so this is changed to the value of the individuals pre-commencement pension rights.

Article 34 provides transitional protection for dependants over the age of 23 who are in full time education or have become incapacitated before that age. The conditions are set out in paragraphs (1) (4), (5) and (6) and paragraph (3) modifies paragraph 15(2) of Schedule 28 (meaning of “dependant”).

Article 35 modifies paragraph 12(8) of Schedule 36 (“enhanced protection”) so that transfers to insurance companies which are recognised transfers pursuant to section 169(1A) are “permitted transfers”. If the transfer was not a permitted transfer, enhanced protection would be lost.

Article 36 protects an individual’s right to enhanced protection in the event of a transfer made in connection with a wind-up. Paragraphs (1) and (2) set out the applicable conditions. Paragraph (3) modifies paragraph 15 of Schedule 36 (definition of the “relevant crystallised amount”) so that transfers representing crystallised rights which are made in connection with a wind-up shall be valued at £0 for the purposes of calculating the relevant crystallised amount.

Article 37 modifies section 636B ITEPA 2003 (trivial commutation and winding-up lump sums). The section provides for the taxation of trivial commutation lump sums or winding-up lump sums. Paragraph (1) sets out the lump sums that the modification will apply to. Paragraph (2) substitutes a new heading and paragraph (3) adds an “equivalent pension benefits commutation lump sum” to the list in section 636B(1). Paragraph (4) inserts a definition of “equivalent pension benefits commutation lump sum” to the section.

Articles 38 to 41 contain transitional provisions in relation to various lump sums which had become payable under the pre A day regime. Article 38 provides that lump sum payments which meet the conditions set out in paragraph (1) shall be chargeable to income tax in accordance with section 598, 599 or 599A of ICTA even though they were paid after A day. The article applies to lump sums payments which were payable in accordance with the rules of the pension scheme before A day. The article also provides that the reporting requirement shall transfer to the scheme administrator. Article 39 deals with lump sums paid to a member in circumstances of the member’s serious ill-health. Paragraph (2) provides that there is no charge to tax under Part 4 if the sum meets the requirements set out in sub-paragraphs (a) to (d) of article 38(1) (i.e that the sum was paid after A day, in accordance with the rules of the scheme as they stood prior to A day). Paragraphs (3) and (4) set out when a lump is paid in circumstances of the member’s serious ill-health. Article 40 deals with lump sum death benefits payable in respect of the death of a member who died before A day. Paragraph (1) sets out the circumstances in which the article will apply which are similar to those set out in article 38. Paragraph (2) provides that the lump sum shall not be a relevant lump sum death benefit as defined in paragraph 15 of Schedule 32 (benefit crystallisation event 7: meaning of “relevant lump sum death benefit”) and shall be disregarded for the purposes of benefit crystallisation event 7. Paragraph (3) states that the lump sum shall be chargeable under section 648B as if the section was still in force following A day. Paragraph (4) provides that the reporting requirements shall transfer to the scheme administrator. Article 41 provides that paragraphs (3) to (5) of article 40 shall apply to lump sums paid in respect of the death of a dependant of a former member of a pension scheme prior to A day.

The Board of Inland Revenue published a regulatory impact assessment in respect of the provisions of Part 4 of the Finance Act 2004, and subordinate legislation under it, on 8 April 2004. That assessment is now available on the website of HM Revenue and Customs at www.hmrc.gov.uk/ria/simplifying-pensions.pdf or obtained by writing to The Ministerial Correspondence Unit, 1st Floor, Ferrers House, PO Box 38, Castle Meadow Road, Nottingham, NG2 1BB.

Footnotes

[^f00001]: 2004 c. 12.

[^f00002]: 2005 c. 11.

[^f00003]: The Board is defined in section 832 of ICTA as the Commissioners of Inland Revenue.

[^f00004]: i.e. by the Commissioners of Inland Revenue. For the construction of references to the Board in relation to pensions on or after 18 April 2001 see section 50 of the Commissioners for Revenue and Customs Act 2005 c. 11.

[^f00007]: 1989 c. 26. Section 76(6A) and (6C) was inserted by paragraph 2 of Schedule 39 to the FA 1996 and was prospectively repealed by Schedule 42, Part 1 to the FA 2004.

[^f00008]: as substituted by section 38 of FA 2004.

[^f00009]: as substituted by section 40 of FA 2004.

[^f00010]: 2005 c. 5.

[^f00011]: S.I. 2006/208.

[^f00012]: 2003 c. 1. Section 308A was inserted by paragraph 3 of Schedule 33 to the Finance Act 2004.

[^f00013]: Paragraph 16A was inserted by paragraph 28 of Schedule 10 to the Finance Act 2005 (c. 7) with effect from 6th April 206.

[^f00014]: S.I. 1991/1614. The definition of such a scheme was substituted by regulation 3 (b) of S.I. 1998/728.

[^f00015]: Section 634A was inserted by paragraph 4 of Schedule 11 to the Finance Act 1995, amended by paragraphs 12(2)and 18(8) and (9) of Schedule 10 to the Finance Act 1999 and paragraphs 10 and 11 of Part 1 of Schedule 13 to the Finance Act 2000, and prospectively repealed by the relevant entry in Part 3 of Schedule 42 to the Finance Act 2004.

[^f00016]: Paragraph 8(1A) of Schedule 28 was inserted by paragraph 18 of Schedule 10 to the Finance Act 2005.

[^f00017]: Section 634A was inserted by paragraph 4 of Schedule 11 to the Finance Act 1995, amended by paragraphs 12(2)and 18(8) and (9) of Schedule 10 to the Finance Act 1999 and paragraphs 10 and 11 of Part 1 of Schedule 13 to the Finance Act 2000, and prospectively repealed by the relevant entry in Part 3 of Schedule 42 to the Finance Act 2004.

[^f00018]: Section 634A was inserted by paragraph 4 of Schedule 11 to the Finance Act 1995, amended by paragraphs 12(2)and 18(8) and (9) of Schedule 10 to the Finance Act 1999 and paragraphs 10 and 11 of Part 1 of Schedule 13 to the Finance Act 2000, and prospectively repealed by the relevant entry in Part 3 of Schedule 42 to the Finance Act 2004.

[^f00019]: Paragraph 22 was amended by paragraph 21 of Schedule 10 to the Finance Act 2005.

[^f00020]: Section 634A was inserted by paragraph 4 of Schedule 11 to the Finance Act 1995, amended by paragraphs 12(2)and 18(8) and (9) of Schedule 10 to the Finance Act 1999 and paragraphs 10 and 11 of Part 1 of Schedule 13 to the Finance Act 2000, and prospectively repealed by the relevant entry in Part 3 of Schedule 42 to the Finance Act 2004.

[^f00021]: Paragraph 11 to Schedule 28 of the Finance Act 2004 was amended by paragraph 20 of Schedule 10 to the Finance Act 2005

[^f00022]: Paragraph 11 to Schedule 28 of the Finance Act 2004 was amended by paragraph 20 of Schedule 10 to the Finance Act 2005.

[^f00023]: Paragraph 25 of Schedule 28 of the Finance Act 2004 was amended by paragraph 23 of Schedule 10 to the Finance Act 2005.

[^f00024]: Section 169(1A) was inserted into the Finance Act 2004 by paragraph 6 of Schedule 10 to the Finance Act 2005 (c. 7).

[^f00026]: S.I. 1997/785. Paragraph (1A) was inserted by regulation 9 of S.I. 2002/681. There are other amending instruments but none is relevant.

[^f00027]: S.R. 1997 No. 153. Paragraph (1A) was inserted by regulation 8 of S.R 2002 No. 109. There are other amending instruments but none is relevant.

[^f00034]: Section 648B was inserted by paragraph 12 of Schedule 11 to the Finance Act 1995, amended by paragraph 266 of Schedule 1 to the Income Tax (Trading and Other Income Act 2005, and repealed by Part 3 of Schedule 42 to the Finance Act 2004.

[^f00035]: S.I. 2000/2316.