Getting your Act together

Within the wide ranging scope of the Finance Act 2006, there were a number of issues on which legislation was either introduced or amended that impacts the current pension regime.

Taxable Property
The Act give detail of the Governments u-turn regarding investment in residential property, originally announced in December of last year. The legislation goes wider than residential property and includes, subject to a de minimis monetary limit of £6,000, other 'taxable property' such as art, antiques, fine wine and classic cars which could have personal use.

The tax charges applying to investment regulated pension funds (where the member controls the investment decisions made) purchasing such assets after 6 April 2006 are punitive. there will be a member unaurthorised payment charge of 40% of the value placed on such investment which, if significant relative to the size of scheme assets, could also be subject to a 15% surcharge.

The scheme administrator will be subject to a scheme sanction charge of 15% of the value and any income actual or deemed received in relation to the taxable property, will be subject to a scheme sanction charge of 40% - as will any capital gain on disposal of the taxable property.

The intention is to make such investments into investment regulated pension funds, such as SIPPs and SSAS's financially unattractive to the members.

Recycling of pension commencement lump sums
Anti-avoidance legislation is now in place where individuals plan to use part or all of their pension commencement lump sum to increase future contributions to registered pension schemes.

The legislation will potentially impact where:

1. the pension commencement lump sum is more than 1% of the Lifetime Allowance in the year of vesting and;

2. the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum and;

3. increased contributions over the three tax years from when the lump sum is taken (measured on a cumulative basis) exceed 30% of the level pain in the previous two years.

Continuing life cover alongside primary or enhanced protection
Individuals who held significant pension rights on the 5 April 2006 will, by 5 April 2009, register the value of those rights for Primary and/or Enhanced Protection. Some will have death benefits held either within a pension scheme or as a separate policy that would have been payable as a lump sum.

Originally, the legislation ignored the value of such benefits from A-Day protection.

The Act allows (subject to certain rules) the value of the death benefits as at 5 April 2006, if greater than the retirement benefit value, to be protected from recovery charge in the event of death.

Provided the benefit existed before 6 April 2006, and that there is no variation of benefit between 5 April 2006 and when the client dies, an enhanced value can be paid on the client's death. It will be for the client's beneficiaries to apply for such protection on the client's death.

For client's registering for enhanced protection, a contribution to a money purchase arrangement to maintain the life cover will not be treated as a relevant benefit accrual, which would otherwise revoke Enhanced Protection.

A change of policy or sum assured within the contract will lose that protection - the need to make potential beneficiaries aware of the situation will be a further area for advisers to pursue for relevant clients.

The Act highlights that, for many, correct advise can prevent significant tax charges.