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| hot topicsThe new pensions framework |
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Home > Europe Home > Hot Topics > The new pensions framework > Finance and investment | |
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Finance and investmentThis section sets out how pension schemes are paid for. It covers the payments that will fund the Pension Protection Fund as well as the new scheme funding requirements for defined benefit arrangements. It also includes summaries of the Inland Revenue's proposals relating to contributions and the various tax allowances. Finally, there is a brief summary of the main changes relating to scheme investments and a basic guide to what are termed the 'moral hazard' provisions of the Pensions Act 2004. The moral hazard provisions are the powers vested in the new Pensions Regulator to call for additional monies or other financial support when it believes that corporate activity could cause the scheme to call on the Pension Protection Fund. The different sections included are:Investment restrictionsThe Pensions Act 2004 might lead to greater restrictions on self-investment for larger schemes. For many smaller schemes, the Finance Act heralds a relaxation of some of the Inland Revenue's current requirements. Moral hazardIn a move to protect the Pension Protection Fund (PPF) from what the Government perceives to be a risk of manipulation, a series of sections, collectively referred to as the ‘moral hazard clauses’, was introduced into the Pensions Act 2004. These sections set out additional powers that the Pensions Regulator will have in relation to corporate transactions and changes in the structure of group employers. Pension protection leviesThe Pensions Act 2004 introduces four new pension protection levies, which will be imposed on most schemes with a defined benefit element. The Act also replaces the existing compensation levy with a fraud compensation levy, payable by trustees or managers of all types of occupational pension schemes. Scheme-specific funding requirementUnder the European Union Directive, on the activities and supervision of institutions for occupational retirement provision (the IORP Directive), the United Kingdom is required to legislate to ensure that schemes are adequately funded to meet their current and future benefit obligations. It must do so by 23 September 2005. The Pensions Act 2004 builds on the framework set out in the Directive and replaces the existing prescriptive statutory funding test (the Minimum Funding Requirement) with a scheme-specific standard. Share schemes and pensions from A dayFrom A day, the combination of higher limits on individual pension contributions, the inclusion of certain profits from employee share plans in pensionable earnings and the ability to transfer shares from certain plans directly to a pension scheme will allow employees to increase their pension contributions. This fact sheet looks at the interaction between employee share schemes and pension plans. Tax allowances and charges: Annual AllowanceThe Finance Act 2004 introduces an upper limit - the Annual Allowance (AA) - on the amount of tax-relievable contributions and benefits that may be built up in a single tax year. Any amounts in excess of the AA will be subject to a fixed rate tax charge. Tax allowances and charges: Lifetime AllowanceThe Finance Act 2004 replaces the current myriad of Inland Revenue limits on benefits paid from an approved scheme with a Lifetime Allowance (LTA). Where the aggregate value of a member's benefits from all registered schemes exceeds the LTA, the excess will be subject to a fixed rate tax charge. Tax chargesThe Finance Act 2004 amends the tax charges on certain lump sum payments and introduces new, penal, tax charges for payments made that are not authorised under the new tax regime. Tax relief on pension contributionsThe Finance Act 2004 will continue to permit tax-relievable contributions to be paid to registered pension schemes. The present restrictions on personal contributions are being relaxed significantly under the new regime. This note gives a broad outline of the provisions. Action should not be taken on the basis of the information provided without seeking specific advice. Please note that some provisions may be amended in the Finance Act 2005. Global News
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