New tax rules for stakeholder pensions and streamlined income drawdown arrangements were today published in the Finance Bill. The simple integrated tax regime for all defined contribution pensions has been the subject of earlier consultation. The changes to the income draw down arrangements will further cut red tape in pensions.

The Inland Revenue also published the first batch of draft stakeholder tax regulations for consultation. These deal with the practical arrangements for pension companies who receive contributions from individuals net of tax and recover that tax from the Inland Revenue.


Stakeholder pensions and accompanying reform of the tax regime

1. The Finance Bill introduces a simple integrated tax regime for defined contribution (DC) pensions, including stakeholder pensions. They are complementary to provisions in the Welfare Reform and Pension Act 1999, which introduced the non-tax aspects of stakeholder pensions. Stakeholder pensions and the reform of DC pensions will be available from April 2001.

2. Stakeholders will be simple, good value and flexible pensions. They are aimed at people who do not have a second pension because either they do not have access to an occupational pension or find that existing personal pensions do not meet their needs. Through changes in the tax regime, pension provision will be opened up to people who are not working. This will, for the first time, allow carers, mature students, the unemployed and people with divorce settlements to make pension provision for their future.

3. The stakeholder pension tax regime was enthusiastically welcomed when first announced in September 1999. Draft Finance Bill Clauses were issued for consultation on the 22 February and the Government is very grateful for the constructive comments and proposals, which have been received since then. Changes have been made on particular detailed points as part of this consultative process. The main ones are:
the removal of an anomaly in the treatment of life policies held for personal pension scheme purposes. These will not be subject to the chargeable events arrangements (Schedule 13 Paragraph 2);
the Board will be able to approve pension schemes subject to certain conditions being met. New providers, such as affinity groups who are not automatically regulated, will be given tax approval subject to their successful registration as a stakeholder pension. This will then provide the appropriate regulatory protection needed (Schedule 13 Paragraph 6);
shares transferred from the new employee share plan introduced in Finance Bill 2000 will be allowed into stakeholder pensions (Schedule 13 Paragraph 13);
the Board of Inland Revenue will be able to direct occupational money purchase schemes, applying to transfer to the new DC regime, to restrict contributions in respect of certain individuals in a short period between valuation of their rights under the occupational scheme and the approval as a new DC scheme. Regulations under this power will restrict contributions during the migration process to those allowable under the new DC scheme. This will prevent the scheme being overfunded between the date of the approval and the later date when the scheme actually transfers into the new tax regime (Schedule 13 Paragraph 27).

4. As part of the February consultation, the Government asked whether cost effective and workable proposals could be developed for stakeholder to help low and middle earning employees make better use of their occupational pension limits. Discussions have taken place between the pensions industry, employers and IR and DSS officials. Ministers are grateful for the positive contributions made. They are currently considering the suggestions put to them and, if appropriate, changes to introduce any “partial concurrency” will be introduced during the Committee stage of the Finance Bill.

Improvements to personal pension income withdrawal

5. From 1 October 2000 changes to personal pension income withdrawal will allow providers to streamline administration and help bring down costs by:
allowing a personal pension scheme to set a single review date for all of a person’s personal pension arrangements under income withdrawal; and
making reviews more flexible by introducing a two month window for their completion.
In addition, greater flexibility will be introduced to allow people with personal pensions to choose a different investment manager by switching their funds under income withdrawal to a different personal pension scheme. This feature will be included in draft regulations dealing with personal pension transfers on which the Inland Revenue will consult shortly.


Stakeholder pensions

6. The main features of the new simplified integrated tax regime for stakeholder pensions are:
contributions of up to #3,600 can be made each tax year irrespective of earnings;
higher level contributions can be made under the existing personal pension age and earnings related limits. These can continue for 5 years after earnings have ceased;
all contributions from individuals will be paid net of basic rate tax with the pension provider reclaiming that tax from the Inland Revenue;
employers money purchase schemes may opt into this new tax regime;
new and simpler rules will replace the existing “carry back rule”. In view of the general flexibility inherit in the new system, the existing “carry forward” rules will be removed;
within the overall limits, 10 per cent of the pension contribution can be used for life assurance;
tax relief for waiver of pension contributions insurance will be simplified and broadened to circumstances other than ill health, such as unemployment;
shares from an approved employee share scheme can, within the contribution limits, be put into the pension and attract tax relief;
contributors must be resident in the UK or serving, or the spouse of someone serving, abroad undertaking “Crown duties”;
contributions cannot be made by any individuals who are also contributing to an occupational defined benefit scheme, although Ministers are still considering whether to allow “partial concurrency” in specific circumstances (see paragraph 4 above);
simplification will also be carried through into the administrative arrangements for DC pensions – for example, electronic and telephone applications will be permitted and information requirements relaxed;
the rules regarding benefits are being altered to allow phased vesting from within a single arrangement. This technical change will ease administration for the new existing PP providers.

7. As well as publishing the Finance Bill today, the Inland Revenue are also issuing the first batch of draft tax regulations. Comments on these are invited by Friday 12 May 2000. Copies of these can be accessed on the Inland Revenue site at or by e-mailing and including “subscribe regulations” in the subject. Printed copies can be obtained by telephoning 020 7438 7514. Other draft regulations will be published for consultation over the coming weeks.

Improvements to personal pension income withdrawal

8. Personal pension income withdrawal (commonly known as income drawdown) enables people to draw a pension from their personal pension fund but to defer buying an annuity. At present a review of the amount of pension being paid must take place on the third anniversary of income withdrawal starting. So, where a person takes pension in stages the result can be multiple reviews at frequent intervals as a review is needed on the third anniversary of each stage. All personal pension scheme members must secure their pension benefits by using their pension fund to purchase an annuity by age 75.

9. Representations made during a recent Inland Revenue review of income drawdown said that the facility was functioning as expected but might benefit from minor changes to simplify administration. The changes announced today reflect these suggestions.

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