Part 4 Pension schemes etc

Chapter 1 Introduction

Introductory

149 Overview of Part 4

(1) This Part contains tax provision about pension schemes and other similar schemes.

(2) This Chapter defines some basic concepts.

(3) As for the rest of this Part—

• Chapter 2 is about the registration and de-registration of pension schemes,

• Chapter 3 is about the payments that may be made by registered pension schemes and related matters,

• Chapter 4 deals with tax reliefs and exemptions in connection with registered pension schemes,

• Chapter 5 imposes tax charges in connection with registered pension schemes,

• Chapter 6 is about some schemes that are not registered pension schemes,

• Chapter 7 makes provision about compliance,and

• Chapter 8 contains interpretation and other supplementary provisions.

Main concepts

150 Meaning of “pension scheme”

(1) In this Part “pension scheme” means a scheme or other arrangements, comprised in one or more instruments or agreements, having or capable of having effect so as to provide benefits to or in respect of persons—

(a) on retirement,

(b) on death,

(c) on having reached a particular age,

(d) on the onset of serious ill-health or incapacity, or

(e) in similar circumstances.

(2) A pension scheme is a registered pension scheme for the purposes of this Part at any time if it is at that time registered under Chapter 2.

(3) In this Part “public service pension scheme” means a pension scheme—

(a) established by or under any enactment,

(b) approved by a relevant governmental or Parliamentary person or body, or

(c) specified in an order made by the Treasury.

(4) In subsection (3) “a relevant governmental or Parliamentary person or body” means—

(a) a Minister of the Crown or a government department,

(b) the Scottish Parliament, the Scottish Parliamentary Corporate Body or a member of the Scottish Executive,

(c) the National Assembly for Wales, or

(d) the Northern Ireland Assembly, the Northern Ireland Assembly Commission, a Northern Ireland Minister, the head of a Northern Ireland department or a Northern Ireland department.

(5) In this Part “occupational pension scheme” means a pension scheme established by an employer or employers and having or capable of having effect so as to provide benefits to or in respect of any or all of the employees of—

(a) that employer or those employers, or

(b) any other employer,

(whether or not it also has or is capable of having effect so as to provide benefits to or in respect of other persons).

(6) In this Part “sponsoring employer”, in relation to an occupational pension scheme, means the employer, or any of the employers, to or in respect of any or all of whose employees the pension scheme has, or is capable of having, effect so as to provide benefits.

(7) In this Part “overseas pension scheme” means a pension scheme (other than a registered pension scheme) which—

(a) is established in a country or territory outside the United Kingdom, and

(b) satisfies any requirements prescribed for the purposes of this subsection by regulations made by the Board of Inland Revenue.

(8) In this Part “recognised overseas pension scheme” means an overseas pension scheme which—

(a) is established in a country or territory prescribed, or of a description prescribed, for the purposes of this subsection by regulations made by the Board of Inland Revenue, or

(b) satisfies any requirements so prescribed.

151 Meaning of “member”

(1) In this Part “member” in relation to a pension scheme, means any active member, pensioner member, deferred member or pension credit member of the pension scheme.

(2) For the purposes of this Part a person is an active member of a pension scheme if there are presently arrangements made under the pension scheme for the accrual of benefits to or in respect of the person.

(3) For the purposes of this Part a person is a pensioner member of a pension scheme if the person is entitled to the present payment of benefits under the pension scheme and is not an active member.

(4) A person is a deferred member of a pension scheme if the person has accrued rights under the pension scheme and is neither an active member nor a pensioner member.

(5) A person is a pension credit member of a pension scheme if the person has rights under the pension scheme which are attributable (directly or indirectly) to pension credits.

152 Meaning of “arrangement”

(1) In this Part “arrangement”, in relation to a member of a pension scheme, means an arrangement relating to the member under the pension scheme.

(2) For the purposes of this Part an arrangement is a “money purchase arrangement” at any time if, at that time, all the benefits that may be provided to or in respect of the member under the arrangement are cash balance benefits or other money purchase benefits.

(3) For the purposes of this Part a money purchase arrangement is a “cash balance arrangement” at any time if, at that time, all the benefits that may be provided to or in respect of the member under the arrangement are cash balance benefits.

(4) In this Part “money purchase benefits”, in relation to a member of a pension scheme, means benefits the rate or amount of which is calculated by reference to an amount available for the provision of benefits to or in respect of the member (whether the amount so available is calculated by reference to payments made under the pension scheme by the member or any other person in respect of the member or any other factor).

(5) In this Part “cash balance benefits” means benefits the rate or amount of which is calculated by reference to an amount available for the provision of benefits to or in respect of the member calculated otherwise than wholly by reference to payments made under the arrangement by the member or by any other person in respect of the member (or transfers or other credits).

(6) For the purposes of this Part an arrangement is a “defined benefits arrangement” at any time if, at that time, all the benefits that may be provided to or in respect of the member under the arrangement are defined benefits.

(7) In this Part “defined benefits”, in relation to a member of a pension scheme, means benefits which are not money purchase benefits (but which are calculated by reference to earnings or service of the member or any other factor other than an amount available for their provision).

(8) For the purposes of this Part an arrangement is a “hybrid arrangement” at any time if, at that time, all of the benefits that may be provided to or in respect of the member under the arrangement are, depending on the circumstances, to be of one of any two or three of the following varieties—

(a) cash balance benefits,

(b) other money purchase benefits, and

(c) defined benefits.

(9) Where not all of the benefits that may be provided under an arrangement to or in respect of the member are of the same one of those varieties of benefits, the arrangement is to be treated for the purposes of this Part as being two or three separate arrangements one of which relates to each of the two or three varieties of benefits that may be so provided.

Chapter 2 Registration of pension schemes

Registration

153 Registration of pension schemes

(1) An application may be made to the Inland Revenue for a pension scheme to be registered.

(2) The application—

(a) must contain any information which is reasonably required by the Inland Revenue in any form specified by the Board of Inland Revenue, and

(b) must be accompanied by a declaration that the application is made by the scheme administrator (see section 270) and any other declarations by the scheme administrator which are reasonably required by the Inland Revenue.

(3) The declarations which the Inland Revenue may require to accompany an application for the registration of a pension scheme include, in particular, a declaration that the instruments or agreements by which it is constituted do not entitle any person to unauthorised payments (see section 160(5)).

(4) On receipt of an application for a pension scheme to be registered the Inland Revenue must decide whether or not to register the pension scheme.

(5) The Inland Revenue’s decision must be to register the pension scheme unless it appears that—

(a) any information contained in the application is incorrect, or

(b) any declaration accompanying it is false.

(6) The Inland Revenue must notify the scheme administrator of the decision on the application.

(7) Unless the Inland Revenue’s decision is not to register the pension scheme, the notification must state the day on and after which the pension scheme will be a registered pension scheme.

(8) An annuity contract—

(a) by means of which benefits under a registered pension scheme have been secured, but

(b) which does not provide for the immediate payment of benefits,

is to be treated as having become a registered pension scheme on the day on which it is made.

(9) Schedule 36 contains (in Part 1) provisions treating certain pension schemes in existence immediately before 6th April 2006 as registered pension schemes (and related provisions).

154 Persons by whom registered pension scheme may be established

(1) An application to register a pension scheme may be made only if the pension scheme is an occupational pension scheme or has been established by—

(a) an insurance company (see section 275),

(b) a unit trust scheme manager,

(c) an operator, trustee or depositary of a recognised EEA collective investment scheme,

(d) an authorised open-ended investment company,

(e) a building society,

(f) a bank, or

(g) an EEA investment portfolio manager.

(2) But subsection (1) does not apply to a public service pension scheme.

(3) Section 155 defines terms used in subsection (1)(b) to (g).

(4) The Treasury may by order amend this section and section 155.

155 Persons by whom scheme may be established: supplementary

(1) This section has effect for defining terms used in section 154(1)(b) to (g).

(2) “Unit trust scheme manager” means—

(a) a person who has permission under Part 4 of FISMA 2000 to manage unit trust schemes authorised under section 243 of FISMA 2000, or

(b) a firm which has permission under paragraph 4 of Schedule 4 to FISMA 2000 (as a result of qualifying for authorisation under paragraph 2 of that Schedule: Treaty firms) to manage unit trust schemes authorised under that section.

(3) “Recognised EEA collective investment scheme” means a collective investment scheme (within the meaning given by section 235 of FISMA 2000) which is recognised by virtue of section 264 of FISMA 2000 (schemes constituted in other EEA States).

(4) “Authorised open-ended investment company” has the meaning given by section 237(3) of FISMA 2000.

(5) “Building society” means a building society within the Building Societies Act 1986 (c. 53).

(6) “Bank” means—

(a) a person falling within section 840A(1)(b) of ICTA (persons, other than building societies etc. permitted to accept deposits), or

(b) a body corporate which is a subsidiary or holding company of a person falling within section 840A(1)(b) of ICTA or is a subsidiary of the holding company of such a person.

In paragraph (b) “subsidiary” and “holding company” are to be read in accordance with section 736 of the Companies Act 1985 (c. 6) or Article 4 of the Companies (Northern Ireland) Order 1986 (S.I. 1986/1032 (N.I. 6)).

(7) “EEA investment portfolio manager” means an institution which—

(a) is an EEA firm of the kind mentioned in paragraph 5(a), (b) or (c) of Schedule 3 to FISMA 2000 (certain credit and financial institutions),

(b) qualifies for authorisation under paragraph 12(1) or (2) of that Schedule, and

(c) has permission under FISMA 2000 to manage portfolios of investments.

156 Appeal against decision not to register

(1) This section applies where, on an application for a pension scheme to be registered, the Inland Revenue’s decision is not to register the pension scheme.

(2) The scheme administrator may appeal against the decision.

(3) The appeal is to the General Commissioners, except that the scheme administrator may elect (in accordance with section 46(1) of TMA 1970) to bring the appeal before the Special Commissioners instead of the General Commissioners.

(4) Paragraphs 1, 2, 8 and 9 of Schedule 3 to TMA 1970 (rules for assigning proceedings to General Commissioners) have effect to identify the General Commissioners before whom an appeal under this section is to be brought, but subject to modifications specified in an order made by the Board of Inland Revenue.

(5) An appeal under this section against a decision must be brought within the period of 30 days beginning with the day on which the scheme administrator was notified of the decision.

(6) The Commissioners before whom an appeal under this section is brought must consider whether the pension scheme ought to have been registered by the Inland Revenue.

(7) If they decide that the pension scheme ought not to have been registered by the Inland Revenue, they must dismiss the appeal.

(8) If they decide that the pension scheme ought to have been registered by the Inland Revenue, the pension scheme is to be treated as having been registered on such date as the Commissioners determine (but subject to any further appeal or any determination on, or in consequence of, a case stated).

De-registration

157 De-registration

(1) The Inland Revenue may withdraw the registration of a pension scheme.

(2) If the Inland Revenue withdraws the registration of a pension scheme the Inland Revenue must notify the scheme administrator.

(3) If there is no-one who is the scheme administrator, the Inland Revenue must instead notify any person or persons—

(a) who has or have responsibility for the discharge of any obligation relating to the pension scheme under section 271(4) (continuation of liability where no scheme administrator), section 272 (trustees etc.) or section 273 (members), and

(b) whom it is reasonably practicable for the Inland Revenue to identify.

(4) The notification must state the date on and after which the pension scheme will not be a registered pension scheme.

158 Grounds for de-registration

(1) The registration of a pension scheme may be withdrawn under section 157 only if it appears to the Inland Revenue—

(a) that the amount of the scheme chargeable payments (see section 241) made by the pension scheme during any period of 12 months exceeds the de-registration threshold,

(b) that the scheme administrator fails to pay a substantial amount of tax (or interest on tax) due from the scheme administrator by virtue of this Part,

(c) that the scheme administrator fails to provide information required to be provided to the Inland Revenue by virtue of this Part and the failure is significant,

(d) that any information contained in the application to register the pension scheme or otherwise provided to the Inland Revenue is incorrect in a material particular,

(e) that any declaration accompanying that application or the provision of other information to the Inland Revenue is false in a material particular, or

(f) that there is no scheme administrator.

(2) The amount of the scheme chargeable payments made by a pension scheme during any period of 12 months exceeds the de-registration threshold if the scheme chargeable payments percentage is 25% or more.

(3) The scheme chargeable payments percentage is—

(a) if only one scheme chargeable payment is made during the period of 12 months, the percentage of the pension fund used up on the occasion of that scheme chargeable payment, and

(b) if two or more scheme chargeable payments are made during the period of 12 months, the aggregate of the percentages of the pension fund used up on the occasion of each of those scheme chargeable payments.

(4) The percentage of the pension fund used up on the occasion of a scheme chargeable payment is—

(5) A failure by a scheme administrator to provide information required to be provided to the Inland Revenue by or under this Part is significant if—

(a) the amount of information which the scheme administrator fails to provide is substantial, or

(b) the failure to provide the information is likely to result in serious prejudice to the assessment or collection of tax.

159 Appeal against decision to de-register

(1) This section applies where the Inland Revenue decides to withdraw the registration of a pension scheme under section 157.

(2) The scheme administrator, or any person notified under that section of the withdrawal of registration, may appeal against the decision.

(3) The appeal is to the General Commissioners, except that the appellant may elect (in accordance with section 46(1) of TMA 1970) to bring the appeal before the Special Commissioners instead of the General Commissioners.

(4) Paragraphs 1, 2, 8 and 9 of Schedule 3 to TMA 1970 (rules for assigning proceedings to General Commissioners) have effect to identify the General Commissioners before whom an appeal under this section is to be brought, but subject to modifications specified in an order made by the Board of Inland Revenue.

(5) An appeal under this section against a decision must be brought within the period of 30 days beginning with the day on which the appellant was notified of the decision.

(6) The Commissioners before whom an appeal under this section is brought must consider whether the registration of the pension scheme ought to have been withdrawn.

(7) If they decide that the registration of the pension scheme ought to have been withdrawn, they must dismiss the appeal.

(8) If they decide that the registration of the pension scheme ought not to have been withdrawn, the pension scheme is to be treated as having remained a registered pension scheme (but subject to any further appeal or any determination on, or in consequence of, a case stated).

Chapter 3 Payments by registered pension schemes

Introductory

160 Payments by registered pension schemes

(1) The only payments which a registered pension scheme is authorised to make to or in respect of a member of the pension scheme are those specified in section 164.

(2) In this Part “unauthorised member payment” means—

(a) a payment by a registered pension scheme to or in respect of a member of the pension scheme which is not authorised by section 164, and

(b) anything which is to be treated as an unauthorised payment to or in respect of a member of the pension scheme under section 172, 173 or 174.

(3) The only payments which a registered pension scheme that is an occupational pension scheme is authorised to make to or in respect of a sponsoring employer are those specified in section 175.

(4) In this Part “unauthorised employer payment” means—

(a) a payment by a registered pension scheme that is an occupational pension scheme, to or in respect of a sponsoring employer, which is not authorised by section 175, and

(b) anything which is to be treated as an unauthorised payment to a sponsoring employer under section 181.

(5) In this Part “unauthorised payment” means—

(a) an unauthorised member payment, or

(b) an unauthorised employer payment.

(6) As well as section 157 (de-registration), the following provisions—

(a) section 208 (unauthorised payments charge),

(b) section 209 (unauthorised payments surcharge),

(c) section 239 (scheme sanction charge), and

(d) section 242 (de-registration charge),

specify consequences of making unauthorised payments.

(7) Sections 182 to 185 contain provision about amounts that a registered pension scheme is not authorised to borrow.

(8) As well as section 157, sections 239 and 242 specify consequences of unauthorised borrowing.

(9) Schedule 36 contains (in Parts 3 and 4) transitional provision about unauthorised payments.

161 Meaning of “payment” etc

(1) This section applies for the interpretation of this Chapter.

(2) “Payment” includes a transfer of assets and any other transfer of money’s worth.

(3) Subsection (4) applies to a payment made or benefit provided under or in connection with an investment (including an insurance contract or annuity) acquired using sums or assets held for the purposes of a registered pension scheme.

(4) The payment or benefit is to be treated as made or provided from sums or assets held for the purposes of the pension scheme, even if the pension scheme has been wound up since the investment was acquired.

(5) A payment made by a registered pension scheme to a person who—

(a) is connected with a member or sponsoring employer (or was connected with a member at the date of the member’s death), and

(b) is not a member or sponsoring employer,

is to be treated as made in respect of the member or sponsoring employer.

(6) Any asset held by a person connected with a member or sponsoring employer (or who was connected with a member at the date of the member’s death) is to be treated as held for the benefit of the member or sponsoring employer.

(7) Any increase in the value of an asset held by, or reduction in the liability of, a person connected with a member or sponsoring employer (or who was connected with a member at the date of the member’s death) is to be treated as an increase or reduction for the benefit of the member or sponsoring employer.

(8) Section 839 of ICTA (connected persons) applies for the purposes of this section.

162 Meaning of “loan”

(1) This section applies for the interpretation of this Chapter.

(2) “Loan” does not include the purchase of or subscription to debentures, debenture stock, loan stock, bonds, certificates of deposit or other instruments creating or acknowledging indebtedness which are—

(a) listed or dealt in on a recognised stock exchange (within the meaning of section 841 of ICTA), or

(b) offered to the public.

(3) A guarantee of a loan made to or in respect of a member or sponsoring employer of a registered pension scheme is to be treated as a loan to or in respect of the member or sponsoring employer of an amount equal to the amount guaranteed.

(4) If a member or sponsoring employer of a registered pension scheme—

(a) is liable to pay a debt, the right to payment of which constitutes an asset held for the purposes of the pension scheme, but

(b) is not required to pay it by the relevant date,

the debt is to be treated as a loan made by the pension scheme to the member or sponsoring employer on that date.

(5) The relevant date is the date by which a person at arm’s length from the pension scheme might be expected to be required to pay the debt.

163 Meaning of “borrowing” etc

(1) This section applies for the interpretation of this Chapter.

(2) Borrowing is borrowing by a registered pension scheme if the amount borrowed is to be repaid from sums or assets held for the purposes of the pension scheme.

(3) A liability is a liability of a registered pension scheme if the liability is to be met from sums or assets held for the purposes of the pension scheme.

(4) Borrowing by a registered pension scheme is in respect of an arrangement if it is properly attributable to the arrangement in accordance with the provisions of the pension scheme and any just and reasonable apportionment.

Authorised member payments

164 Authorised member payments

The only payments a registered pension scheme is authorised to make to or in respect of a member of the pension scheme are—

(a) pensions permitted by the pension rules or the pension death benefit rules (see sections 165 and 167),

(b) lump sums permitted by the lump sum rule or the lump sum death benefit rule (see sections 166 and 168),

(c) recognised transfers (see section 169),

(d) scheme administration member payments (see section 171),

(e) payments pursuant to a pension sharing order or provision, and

(f) payments of a description prescribed by regulations made by the Board of Inland Revenue.

165 Pension rules

(1) These are the rules relating to the payment of pensions by a registered pension scheme to a member of the pension scheme (“the pension rules”).

Pension rule 1

No payment of pension may be made before the day on which the member reaches normal minimum pension age, unless the ill-health condition was met immediately before the member became entitled to a pension under the pension scheme.

Pension rule 2

If the member dies before the end of the period of ten years beginning with the day on which the member became entitled to a scheme pension, an annuity or alternatively secured pension, payment of the scheme pension, annuity or alternatively secured pension may continue to be made (to any person) until the end of that period.

But no other payment of the member’s pension may be made after the member’s death.

Pension rule 3

No payment of pension other than a scheme pension may be made in respect of a defined benefits arrangement.

Pension rule 4

If the member has not reached the age of 75, no payment of pension other than—

may be made in respect of a money purchase arrangement; but a scheme pension may only be paid if the member had an opportunity to select a lifetime annuity instead.

Pension rule 5

The total amount of unsecured pension paid in each unsecured pension year in respect of a money purchase arrangement must not exceed 120% of the basis amount for the unsecured pension year.

Pension rule 6

If the member has reached the age of 75, no payment of pension other than—

may be made in respect of a money purchase arrangement; but a scheme pension may only be paid if the member had an opportunity to select a lifetime annuity instead.

Pension rule 7

The total amount of alternatively secured pension paid in each alternatively secured pension year in respect of a money purchase arrangement must not exceed 70% of the basis amount for the alternatively secured pension year.

(2) In this Part “pension”, in relation to a registered pension scheme, includes—

(a) an annuity, and

(b) income withdrawal.

(3) For the purposes of this Part, a person becomes entitled to a pension under a registered pension scheme—

(a) in the case of income withdrawal under the pension scheme, whenever sums or assets held for the purposes of an arrangement under the pension scheme are designated as available for the payment of unsecured pension, and

(b) in any other case, when the person first acquires an actual (rather than a prospective) right to receive the pension.

(4) Part 1 of Schedule 28 gives the meaning of expressions used in the pension rules.