Finance Bill 2008 What you need to know

Protected Tax Free Lump Sums

The Finance Bill 2008 confirms details of the changes to the scheme specific transitional protection rules for pension lump sum rights of more than 25% which will for certain members allow a higher amount of tax free lump sum to be paid.

Under the original rules contained in the Finance Act 2004 members of occupational pension schemes who were entitled to tax free lump sum rights of more than 25% at 5 April 2006 were able to have those rights protected. However, the amount of tax free lump sum that could ultimately be paid to the member depended on whether or not they continued to build up benefits under the protected pension scheme after 5 April 2006.

In the Finance Bill there are provisions that will remove this distinction and everyone will just use the same definition for the scheme specific lump sum transitional protection rules regardless of whether or not they continued to build up benefits. This means the lump sum allowed will always now be calculated as:

A-Day lump sum increased in line with lifetime allowance

plus

25% x (fund value - [A-Day fund value increased in line with lifetime allowance])

So those members who do not continue to build up benefits may be able to receive a higher lump sum than they could have under the original transitional protection rules. As before the change these members would only have been allowed the revalued 5 April 2006 lump sum.

The change will be backdated to 6 April 2006.


Triviality Payments

The Finance Bill 2008 includes two new additional trivial commutation rules which will extend the scope of triviality for those with small pension pots. Currently, those with small pension pots can have it paid as a lump sum if the value of their rights under all registered pension schemes is less than 1% of the lifetime allowance, which for the tax year 2008/09 is £16,500. The two new additional triviality rules are:

1. For occupational pension schemes they will be permitted to unilaterally trivially commute benefits valued below £2,000. This will apply even if the aggregate value of benefits held under all registered pension schemes exceeds the 1% of the LTA limit. This new scheme-specific option will not be extended to personal pension schemes because H M Revenue & Customs (HMRC) are worried about the risk of people setting up hundreds of different personal pensions and deliberately funding for triviality.

2. For all schemes, new regulations will allow what HMRC terms 'stranded pots' (i.e. very small funds) to be trivially commuted in specific circumstances. Currently HMRC have not yet issued any further details on the subject.

As with other triviality payments, 25% will be tax-free with the balance taxed as income.