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Sreve Bee on Pensions

We have just had an important indication of the way the Inland Revenue will be policing the exploitation of what it calls “unintended” features of the way the current tax regime will interface with the post-A-Day regime.

The Revenue recently published the worryingly titled, Pensions Update 150: Pre-A-Day Avoidance. This is aimed at closing a supposed loophole of which they have just become aware regarding the use of section 590 schemes by some people.

Ordinarily, company pension schemes are approved under section 591 of the Income and Corporation Taxes Act 1988, and such schemes are referred to as discretionary approved schemes.People who are controlling directors of investment companies are not allowed to join schemes approved under section 591 but can join schemes approved under section 590.

The rules and regulations applying to section 590 schemes are different to those for ordinary section 591 schemes and are not as good.But you do not have to be a controlling director of an investment company to join a section 590 scheme, it is just that employees who are not such directors would usually be better off in a section 591 scheme.

One of the big differences between the two types is that if directors are in a section 590 scheme, the benefits provided by that scheme do not have to be cut back to allow for other pension benefits they may have elsewhere (in personal pensions, for instance).And this, really, is what this PU150 is all about. In effect, people can get back service allowed under a section 590 scheme set up late in life and could ignore substantial pension benefits already held in a personal pension or a stakeholder pension. Effectively, service can be pensioned twice by this means.

What this Revenue update is saying is it has recently become aware of a growing interest in section 590 schemes.Its view is that, on occasions, this may amount to an unintended use of the legal provisions of section 590 to get around, in unacceptable ways, the benefit limits placed on section 591 schemes. It says it is aware this may be happening in some cases as a possible method of quickly double-funding substantial retirement benefits in the run-up to A-Day.

It gives an example in the update of a director with long service with his company who opts out of pensionable service and transfers his maximum accrued benefits from a section 591 approved company pension scheme to a personal pension scheme.The section 591 scheme then winds up and a section 590 scheme is set up to provide additional benefits, back-funded for the years which had already been fully funded in the old section 591 scheme.The effect is to get around the benefit limits applying to occupational pension schemes approved under discretionary practice in what it calls an artificial way.

What the Revenue is saying is it is likely to view this type of staged and exploitative activity as a scheme or arrangement leading to tax avoidance which star-ted at the point of transfer out of the section 591 scheme.Also, where such abuses come to light, it says this will call into question the approval of the originating section 591 scheme.The following extract from the update leaves little doubt about where the Revenue is coming from on this:

“As we move towards the new simplified pensions regime which takes effect on A-Day, the example of abuse outlined (above) takes on an extra degree of urgency, as it could potentially boost a person’s personal lifetime allowance for protection purposes.

“Transitional protection for pre-A-Day rights is only intended to apply to amounts legitimately built up under the current regime.There is no objection to people legitimately maximising their benefits in the run up to A-Day where they are able to do so. But such efforts should remain within the bound of the published discretionary practice as outlined in the practice notes. As explained (above), where schemes or arrangements which seek to circumvent the limitations in the practice notes come to light, the Inland Revenue will consider whether this affects the approval of the schemes involved.This applies whether or not the scheme or arrangement is more or less similar to the example (above).”

Steve Bee is head of pension strategy at Scottish Life.

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