MPs discuss lump sums, pension funds and RPSM03105070

July 13, 2009 at 3:34 pm Leave a comment


by Tony Grew

The Commons was awash with acromyms, schedules and figures on Wednesday night when Barry Gardiner undertook a “technical and complicated” discussion of the Finance Act 2004.

The Labour MP for Brent North had secured an adjournment debate after his attempts to help a constituent had revealed what he called “an anomaly in schedule 29 of the Finance Act 2004 as it relates to tax-free pension lump sum allowances.”

For this reason the case of “Doctor Robert” can’t be remedied at an individual level.

“It can only be remedied by the will of the House in future legislation.”

The debate quickly descended into impenetrable financial jargon, for which Mr Gardiner apologised in advance.

“Since what the Government chose to call A-day, 6 April 2006, there has been a lifetime allowance, known as an LTA, of £1.5 million,” he said.

“That is the limit imposed not on an individual’s pension fund itself, but on that element of the cumulative pension fund from which an individual can withdraw or crystallise a lump sum without incurring a lifetime allowance charge.

“The figures are indexed each year, but if we talk in 2006 money, an individual is entitled to take a tax-free lump sum called a pension commencement lump sum, or PCLS, of up to £375,000, which is 25 per cent. of the standard LTA of £1.5 million.

“My constituent had a pension in progress at A-day that had a capital value of £250,000, with 25 per cent. crystallised lump sum rights of £62,500.

He also had an NHS pension with a capital value of £1.2 million, where, under the NHS scheme, the lump sum entitlement was limited to 13.04 per cent. rather than the Government figure of 25 per cent.

“He also had four other uncrystallised pension funds totalling £580,000 in capital value, and a scheme lump sum entitlement of 20 per cent. amounting to £145,000.

“Finally, he had a post-1987 freestanding additional voluntary contribution scheme worth £60,000.

“That scheme, although allowing him to take a lump sum of £25,000, would under Treasury rules not be allowed to count as part of his VULSR, which is Treasury-speak for valuation of uncrystallised lump sum rights, and could therefore not be calculated towards the total lump sum rights minimum figure of £375,000, at which point he could register for primary or enhanced lump sum protection in accordance with RPSM03105070.”

Mr Gardiner said the idea that the Government can absolve themselves of a duty to get the lump sum rule right by blaming the pension fund’s sponsors is “wide of the mark.”

“The Government have a duty to legislate for the world as it is, and as they know it to be, not to put pensioners on some Procrustean bed and chop them to the same size, regardless of the actual rules of their pension fund, especially when the Government operate two such non-compliant funds themselves, employing millions of public sector workers,” he said.

“There is no specific event report at present for a PCLS paid to an individual with enhanced LTA who does not have additional PCLS rights greater than £375,000.

“A small amendment to the APSS300 reporting requirements of event 6 would go a long way to remedying the anomaly.”

For the government Sarah McCarthy-Fry, Exchequer Secretary to the Treasury, said the constituent has already been the subject of some highly technical and ongoing correspondence with HMRC.

“I do not think that this is the place for that detailed technical discussion of the finer workings of the pension legislation, but it would be helpful if I responded to my hon. Friend by considering the issues in broad terms,” she said.

“If there were no limits to the amounts of tax relief available on pension savings, some people might use them as general savings accounts and would put away far more than was necessary simply to provide a retirement income, instead using pensions as a way to avoid income tax.

“In that case, the cost to the Exchequer in tax relief could be open-ended.

“The cap on the size of tax-free lump sums therefore ensures that the tax relief available for pensions is kept to the level intended by Parliament and allows the Government to monitor the cost of tax relief to the taxpayer.

“As I said, the lifetime allowance is the maximum tax advantaged pension benefits an individual can accumulate, other than under transitional rules.

“That limit is an optional maximum, within which pension funds may decide how best to provide benefits to their members.”

Ms McCarthy-Fry said the current rules work well for the vast majority of people and very few pensioners will have pensions “anywhere near” the lifetime allowance.

“It is also important to bear it in mind that the tax rules do not guarantee that the maximum tax-advantaged benefit can always be paid: they simply provide a framework within which a pension scheme and its members are free to order their affairs as they wish,” she said.

“In some circumstances, that will mean that a member will not be able to obtain the maximum tax advantages.

“The legislation deliberately does not prescribe the level of the tax-free lump sum.

“Instead, it provides a framework within which pension funds and individuals must operate, and that means that pension funds have the freedom to determine the appropriate package of benefits that they offer to their members.

“Legislating that pension schemes must provide a 25 per cent. lump sum, or allowing individuals to take a higher percentage from one fund to make up a lower percentage from another, would effectively remove the ability for pension funds to manage their affairs.

“There is nothing to stop the maximum lump sum being paid if the member and pension scheme want to reorder their affairs.

“It is for the pension scheme to decide what benefits it wants to pay and for the individual to decide how to take them, within the framework that the legislation provides.

“Of course the Government keep all tax policy under review, but the rules cannot cater for all circumstances and it would be unrealistic to change them to try to do so.

“The Government want to balance fairness and simplicity, and we think that the rules would become overly complicated if they were to accommodate the circumstances of all individuals.”


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