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There are always going to changes to rules but but this must not mean inaction

Sometimes, I hear people say that they cannot advise clients about pension tax simplification until the rules are finalised. If by “finalised” they mean “fixed for good”, then I have got news for them – the rules will never be finalised so inaction is not an option. From the start, the rules have been tweaked, they are being tweaked now and they will continue to be tweaked after A-Day.

There are in essence four types of rule change which I can identify. Type one is to correct an error, two is to change practice as a result of legal opinion received by HMRC, three is a change in policy originated by HMRC and four is a change in policy accepted by HMRC after lobbying by the pension industry or others.

At the time of writing, the most recent change is a mix of type three and type four. HMRC has announced that pension scheme filing for at least the first six months after A-Day may be paper-based if the scheme wishes. Both HMRC and the pension industry agree that schemes are not ready to send and HMRC is not ready to receive on a 100 per cent electronic basis.

An example of a rule change in the past was the triviality rule. Originally, it was intended that commutation on the grounds of triviality would be allowed by looking only at the pension entitlement in question. Once HMRC realised that best advice would be for everyone to run a 14,900 pension pot alongside their main pension, they made a “type three” change.

There are some changes being made just now. A “type two” change is HMRC’s clarification of death benefits where people claim enhanced protection after A-Day. Following legal advice, HMRC says there will be two categories, depending totally on the benefit promises. These two categories of death benefit are defined-benefit and pure money-purchase. This is a very complex area and great care should be taken to avoid losing enhanced protection on death.

However, as long as there is flexibility to pay death benefits as dependant’s pension and a dependant does exist on the member’s death, it ought to be possible to avoid a 55 per cent tax charge on any of the death benefits. Care should however be taken to avoid contributions for money-purchase death benefits as this would immediately invalidate enhanced protection.

Another example of a current change is the winding-up regulations, so that a scheme which winds up after A-Day can still protect tax-free cash where the benefits are secured by deferred annuity, including Section 32. This was a “type four” change because it was lobbied for by sections of the pensions industry, including my own company.

An example of a future change is inheritance tax. This is a “type three” because HMRC wants to collect more inheritance tax. There has been a consultation paper recently on this and it may be some months before we know the outcome. I hope it will be different from the Draconian proposals in the consultation paper.

Another example of a future change which we know is coming is the new benefit crystallisation event 5A to test people in unsec-ured pensions against the lifetime allowance when they reach age 75 and enter an alternatively secured pension. This is another “type three” which only HMRC wants.

Finally, to show why we should expect further changes indefinitely, consider as an example the current rule about benefit- in-kind tax charges for residential property in Sipps after A-Day. At the moment, the rule says such a charge will arise if your immediate family occupies the property without paying a full market rent. People are already saying this will allow grandchildren, nephews and nieces to occupy the property without an additional tax charge. If HMRC sees this happening, I think we will see a “type three” before you can say “student flat”.

There will always be changes to the rules. Nobody can afford to use that simple fact as a justification for sitting on their hands.


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