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Pensions

Pensions Tax | Tax charges on alternatively-secured pensions

Pensions Tax
The Government has announced a number of further amendments to the new tax regime for pensions which came into effect on 6 April 2006. These may be summarised as follows:

• minor non-cash benefits provided to retired employees will not be subject to income tax if they are similar to the exempt benefits provided to employees;

• the time limit for paying lump sum death benefits free of IHT at the trustees’ discretion will be aligned with the pension tax rules so that the two year period will run from the date on which the scheme is notified, or could reasonably have been aware, of the member’s death;

• individuals will no longer get tax relief on premiums paid to personal fixed term life insurance policies provided through personal or occupational pension schemes, where the only benefit payable is a lump sum on death or critical illness. This will affect single life and most joint life personal term assurance policies and policies under which all the insured members are of the same family. Relief for personal premiums paid to policies taken out before the relevant cut-off date may continue provided the policy is not varied. Contributions paid by employers are unaffected;

• anti-avoidance measures will prevent manipulation of the amount subject to tax charges when unauthorised payments are made to scheme members or sponsoring employers, and will treat as unauthorised any ‘tax-free’ lump sum payment derived from a reduction in an ill-health pension where that reduction is part of ‘avoidance arrangements’.

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Tax charges on alternatively-secured pensions
The Budget announced modifications of the PBR proposals to limit the tax advantages of alternatively secured pensions (ASPs) as an inheritance tax shelter. It also explains further the proposed interaction of the unauthorised payments and inheritance tax charges.

Recovery charges will not now apply where the member or his dependent dies before 6 April 2007. Nor will it apply where the pension scheme provider is unable to trace the member, provided payment at the minimum rate commences within 6 months if he or she is subsequently found.

The Budget also clarifies the interaction of the recovery and inheritance tax charges, bearing in mind that both may apply, and in either order. The rule is that the second charge applies to the net value after the first.
 

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