Effective Date

The Government are to decide in the 2004 March Budget whether to introduce the simplified regime. If they do, it will form part of the 2004 Finance Bill, and become effective from the 6th April 2005 ("A Day"), if not, pensions will remain unchanged.
If introduced, all types of pension arrangement will be subject to the new regime, and an individual can have any number of pension arrangements. In the case of Small Self-Administered Schemes (SSAS), it will no longer be necessary to have a Pensioneer Trustee, although under Department of Works and Pensions (DWP) regulations, a professional trustee will be required in certain cases such as where self-investment is carried out. To obtain tax advantages, pension schemes must be "Registered". Otherwise, no such advantages will be available.
Funded Unapproved Retirement Benefit Schemes (FURBS) and Unfunded Retirement Benefit Schemes (URBS), will be treated as non-registered, however existing approved schemes will automatically be treated as registered. Approved schemes will have the choice on A Day to opt out of the new regime and at this point, there will be a 40% tax charge on the value of the fund, and all deductions from the fund will be subject to Income Tax and National Insurance. It is important to note that there will be a civil penalty of £3,000 per offence for "Trust-Busting"
CONTRIBUTIONS
Personal contributions will be limited to a maximum of 100% of earnings each year, however where an individual has no earnings, a maximum of £3,600 p.a. can be paid Company contributions will be limited to a maximum of £200,000 per member per year, increased in line with RPI and rounded-up to the nearest £1000. The annual "contribution" to final salary schemes is to be calculated as £10 for every £1 of accrued pension entitlement each year, at all ages.
There will be no limit to contributions in the year of retirement, provided benefits are taken in full. There is the option to opt-out of paying future contributions or accruing future pensionable service, so as to protect existing accrued benefits. Tax relief on contributions will continue to be granted as at present and no contributions are payable after age 75.
Carry-back, and carry-forward (for Retirement Annuity policies) will be abolished and contracted-out National Insurance rebates, and pension transfers will not count towards the annual contribution limit. Existing pre-6th April 2001 waiver of premium arrangements will be allowed to continue. Contributions in excess of theses limits can be paid, but tax relief will not be granted.
INVESTMENTS
Comments made are somewhat vague, but for all types of pension scheme there will be one set of allowable investments.
DWP regulations will affect the conduct of investments and "all" types of investments will be allowable, with transitional rules so forced disposal of existing investments will not be necessary. The document mentions a painting or residential property as examples.

Self-Investment regulations will be amended as follows:
- Shares in the sponsoring employer will be limited to 5% of the fund value.
- No loans will be permitted to pension scheme members.
- Loans to the sponsoring / associated employer must be:
a) secured on the company's assets
b) incorporate interest at a minimum of base rate plus 1%
c) have a maximum term of 5 years
d) not exceed 50% of the fund value
e) be repaid in equal annual instalments
All purchases, sales and leases of investments must be at commercial rates, and loans to 3rd parties must be on commercial terms.
Pension scheme borrowing will be limited to a maximum of 50% of the fund value and assets held by schemes can be "enjoyed" by scheme members (at a commercial rate).
Connected party transactions are allowable, but will be banned again if there is abuse of this rule. Any breaches of the regulations will be deemed as an unauthorised payment, which will be taxed at 40%. If the payment is made to a scheme member or sponsoring employer, it is also taxed at their marginal rates. However any scheme deemed as trading, will have its income taxed appropriately.
RETIREMENT BENEFITS
There will be one set of General Benefit Rules for all pension schemes.
Retirement benefits can be payable while the individual continues to work, but benefits must commence by age 75. Minimum pension age will increase to 55 by 2010, however those with contractual rights to draw benefits at age 50 will be able to do so, as long as their employment terminates.
There will be an overriding "Lifetime Limit" on an individual's tax-advantaged pension fund of £1.4 million which is increased annually in line with RPI, and rounded-up to the nearest £10,000. Final salary benefits will be tested against the lifetime limit on the basis of £20 for every £1 of pension entitlement, for members of all ages. The lifetime limit will be tested when an individual commences drawing some or all of their retirement benefits. Funds in excess of the lifetime limit will be subject to tax (a "recovery charge"). However subject to the lifetime limit, 25% of accrued pension funds at retirement can be taken as a tax-free lump sum.
The balance of accrued funds is paid as a pension, which is subject to income tax. The pension must last for the remainder of the individual's lifetime, and be paid regularly (at least in annual instalments). Payment of pensions must either be via an annuity (the amount determined by prevailing annuity rates), from an employer sponsored scheme, or in "unsecured" form by drawdown. Benefits can be "phased" (i.e. drawn in stages). When paid by drawdown, before age 75 the maximum pension will be 120% of the best single life, non-increasing annuity available on the open market. The minimum pension will be £1 p.a. The maximum pension level must be reviewed at least every five years. Drawdown after age 75 will be permitted. The maximum pension will be 70% of the best open market annuity rate for a 75 year old (in all cases), with a minimum of £1 p.a. The maximum pension must be reviewed annually. There will be two new types of annuity available - temporary annuities, which can last for a maximum of five years, and capital protected annuities. Neither are allowable after age 75 and there will be no return of capital on death after age 75 from either an annuity or a drawdown fund. This implies that Open Annuities will no longer be permitted.
Those with funds in excess of the lifetime limit at retirement can choose either to pay a 25% recovery charge on this amount, and to draw the balance as a pension, subject to income tax, or to draw the total amount as a lump sum subject to a recovery charge of 55%. Pre A Day pension rights in excess of the lifetime limit can be protected from the recovery charge, provided these are registered within 3 years of A Day (these rights must not exceed pre A Day allowable limits -i.e. must not be in surplus). This can be done in one of 2 ways:
· Primary Protection - funds in excess of the £1.4 million lifetime limit can be index-linked up to the date benefits are taken. If funds grow in excess of RPI, the recovery charge will apply to the excess. Pre A Day tax-free cash entitlement will be index-linked in the same way.
· Enhanced Protection - whether or not benefits at A Day exceed the lifetime limit, these can be protected by the individual ceasing active membership of the scheme at A Day (i.e. pay no further contributions and cease accruing pensionable service). All benefits taken on retirement will then be exempt from the recovery charge, regardless of post A Day fund growth. Pre A Day tax-free cash entitlement will be expressed as a percentage of overall accumulated funds. The same percentage can then be paid as tax-free cash on retirement post A Day. Enhanced Protection can be revoked by resuming active scheme membership at any time prior to age 75.
For those with funds below the lifetime limit on retirement, pre A Day tax-free cash entitlement in excess of 25% of the fund value can be registered. Post A Day tax-free cash entitlement will be 25% of post A Day accumulated pension rights, giving an overall tax-free cash entitlement of the two amounts combined. Payment of lump sums in excess of 25% of the lifetime limit are subject to tax at the individual's marginal rate and where the individual is entitled to tax-free cash in excess of 25% of the lifetime limit (due to primary or enhanced protection), they can claim a refund for the difference. In cases where funds are below the lifetime limit, all lump sum entitlement can be paid tax-free immediately.

There will be specific rules for valuing pre A Day pension rights. For example, pensions already in payment will be valued as £25 for every £1 of annual pension. Pension drawdown will be the maximum pension allowable, taken from the last review.
Ill health early retirement, and full commutation in cases of serious ill health will continue to be allowed. Commutation on grounds of triviality will be permitted where pension funds do not exceed 1% of the lifetime limit each year. This can either be on a voluntary basis, or in cases of schemes winding-up. In such cases, 25% of benefits can be paid as a tax-free lump sum, and the balance subject to income tax. In cases of divorce, pension credits will count towards the recipient's lifetime allowance, and pension debits will not count towards the donor's lifetime allowance. For pre A Day pension rights, pension credits will be ignored when calculating the receiving spouse's lifetime limit.

DEATH BENEFITS
Benefits from "unvested" funds (i.e. where no retirement benefits have been paid):
· The whole accumulated fund can be paid to the beneficiaries as a tax-free lump sum, provided death occurs before age 75. Any excess over the lifetime limit is subject to a recovery charge unless protected by primary or enhanced protection.
· Alternatively, the fund can be used to pay a dependant's pension subject to income tax, with no test against the lifetime limit.
· A combination of the two is allowable.
Benefits from "vested" funds (i.e. retirement benefits are in payment):
· Death before age 75:
- The whole of a drawdown fund can be paid as a lump sum subject to tax at 35%. Or a dependant's pension can be paid, subject to income tax either via an annuity or drawdown
- Or where benefits had been secured via an annuity or employer sponsored scheme, the balance of any guaranteed period can be paid (the maximum guarantee period being 10 years)
- Or where benefits had been secured via a value protected annuity, the purchase price less pension payments made can be paid as a lump sum subject to tax at 35%.
· Death after age 75:
- No return of any remaining capital is permitted, either directly or indirectly
- Only a dependant's pension can be paid, which is subject to income tax.

Action Points

Pre ‘A’ Day
FURBS before ‘A’ Day:
· Not included in lifetime allowance
· Existing funds in FURBS will remain outside the estate for IHT purposes

Existing Uncapped Funds
· Until ‘A’ Day to increase fund
· Contribute to maximum
· Consider FURBS to increase income

Protecting Tax-Free Cash
· Protection of tax-free cash over 25% specific to scheme
· Should benefits be transferred to Section 32 before ‘A’ Day?

Registering Benefits
· 3 years to value and register benefits
Protection of funds over £1.4m
Enhanced protection of schemes (must opt out of pensionable service before 6/4/05)
· Test all funds likely to exceed lifetime allowance and register if possible

Over Funded Situations

· Retire day before 'A' Day from all arrangements
Pension may be restricted by pre-'A' Day limits creating surplus
· Day after 'A' Day augment benefits to use up surplus

Pre ‘A’ Day – Summary

· Identify all pension arrangements
· FURBS before 'A' Day?
· Maximise contributions to approved arrangements?
· Tax-free entitlements?
· Transfer tax-free entitlement to Section 32?
· Retire if over funded?

Investment Strategies - Pre 'A' Day
· Convert existing EPPs to SSAS
· Maximise self-investment under existing rules
30% share capital in sponsoring company
50% loanbacks unsecured
· Maximise borrowings in schemes
45% of value of fund
Plus 3 times ordinary contributions
· May borrow to purchase assets
· May borrow to invest in other assets (including loans)

Post 'A' Day

Personal Pensions
· Wider investments powers - residential property?
· Ill-health and serious ill-health improvements
· Little change to income drawdown

Large Company Pensions
· Review arrangements
· Change scheme rules
· Change employee contracts
· Possibility to offer in one scheme
Defined Benefit for a basic pension
Defined Contribution for top-up
Defined Contribution for directors and executives

What’s the next step?

If you require tax advice on any of these areas please contact John Bowman, 020 7556 1293 or bowmanj@buzzacott.co.uk , or David Frost, 020 7556 1285 or frostd@buzzacott.co.uk

If you require advice about pensions or investments, please contact Richard Cobbold, 020 7556 1255 or cobboldr@buzzacott.co.uk, or Rachel O’Donoghue, 020 7556 1256 or odonoghuer@buzzacott.co.uk

Buzzacott Financial Services Ltd
12 New Fetter Lane, London EC4A 1AG
Authorised and Regulated by the Financial Services Authority

This article is for guidance only. The contents are based on our understanding of applicable law and Inland Revenue practice as at date of issue. The rules, tax rates and regulations that apply may be subject to change in the future. All clients have different personal circumstances. This is a very complex area and professional advice should be obtained before any action is taken or refrained from. The past is not necessarily a guide to future performance and past performance may not necessarily be repeated.