Explanatory note

This Order amends the Taxation of Pension Schemes (Transitional Provisions) Order 2006 (“the principal Order”) in order to make further transitional provision in relation to the taxation of pensions.

Article 3 has retrospective effect, from 6th April 2006. Article 5 has retrospective effect, from 6th April 2010. Section 282(A1) of the Finance Act 2004 (“the Act”) provides that an order made under Part 4 of that Act may include provision having effect in relation to times before the order is made if that provision does not increase any person’s liability to tax.

Article 3 amends the principal Order by inserting articles 23ZA to 23ZE which relate to pension commencement lump sums.

The inserted article 23ZA provides for cases when an individual has received a pension commencement lump sum but dies before becoming entitled to the pension or pensions in connection with which it is paid. The article modifies paragraphs 31 and 34 of Schedule 36 to the Act which provide for tax free lump sums exceeding 25% of uncrystallised benefits in certain circumstances.

The inserted articles 23ZB to 23ZE provide for cases where there is a single pension commencement lump sum, payable in connection with at least two of the three types of pension (described below) from the same registered pension scheme and an individual becomes or, where the scheme administrator considers, had the individual not died, the individual would have become, entitled to all of the pensions in connection with the pension commencement lump sum within a period of six months. The three types of pension are: a scheme pension under a defined benefits arrangement, a scheme pension under a money purchase arrangement and a lifetime annuity.

Article 23ZC applies where the individual becomes entitled to all of the pensions in connection with which the lump sum is paid. Article 23ZD goes on to make provision for cases where an individual dies before becoming entitled to any of the pensions in connection with which the lump sum, or part of it, is paid. Lastly, article 23ZE provides for when an individual dies after becoming entitled to at least one but not all of the pensions in connection with which the lump sum, or part of it, is paid. These articles modify section 166(2)(a) (entitlement to a lump sum) of, and paragraphs 31 and 34 of Schedule 36 to, the Act.

Article 4 amends the principal Order by inserting articles 42 and 43 which relate to the protected pension age. These articles provide for cases where there is a protected pension age in connection with at least two of the three types of pensions (described above) from the same registered pension scheme. Article 42 allows the transitional protection to apply where the entitlement to all benefits arises within a period of six months. Article 43 allows the transitional protection to apply if, the scheme administrator considers that, had the individual not died, the individual would have been entitled to all of the benefits with a period of six months. These provisions amend paragraphs 22 and 23 of Schedule 36 to the Act which provide for the right to take benefit before the normal minimum pension age (“NMPA”).

Article 5 amends the principal Order by inserting article 44 and 45 which relate to the NMPA. They make transitional provision resulting from the increase in the NMPA, from age 50 to 55 with effect from 6th April 2010, as provided for in section 279 of the Act.

Inserted article 44 modifies the application of pension rule 1 in section 165 of the Act (payment of pension rules). The modification caters for the situation where a benefit crystallisation event (“BCE”) 1, 2, or 4 (as set out in section 216 of the Act) has occurred in respect of a member of a registered pension scheme on or before 5th April 2010 and where that member had reached the then NMPA of 50 on or before that date. The first and any subsequent payments of income withdrawal, a new annuity or scheme pension (“pension payments”) made on or after 6th April 2010 in relation to the sums or assets held for the arrangement in respect of which the BCE occurred will not incur an unauthorised payment charge under section 208 of the Act as the member is deemed to have reached NMPA immediately prior to the date on which that payment is made. For the tax year 2010-2011, the application of this modification is restricted, in respect of additional rate (50%) taxpayers, to 80% of the pension payments only, so as to fall within the power to make retrospective provision which precludes making any provision which may increase a person’s liability to tax.

Inserted article 45 modifies paragraph 1(1)(d) of Schedule 29 to the Act (pension commencement lump sum). The modification deals with the situation where a member, who was aged between 50 and 54 and became entitled to a lump sum on or before 5th April 2010, receives a payment of that lump sum on or after 6th April 2010. The member is deemed to have reached the NMPA immediately prior to payment of the lump sum.

A full and final Impact Assessment has not been produced for this instrument as a negligible impact on the private or voluntary sectors is foreseen.