Section 52: Abolition of Contracting Out of State Second Pension: Consequential Amendments
Summary
1.Section 52 repeals the specified provisions of the pensions tax legislation to reflect that contracting out of the state second pension through a defined contribution (money purchase) pension scheme was abolished from 6 April 2012. Following on from one of the repeals, the section also sets out an amendment to a further provision of the pensions tax legislation.
Details of the Section
2.Subsection (2) repeals subsection 188(3)(c) Finance Act 2004 (FA 2004) which provides that age-related rebates and minimum contributions paid to pension schemes by Her Majesty’s Revenue and Customs (HMRC) are not eligible for tax relief as member contributions. As no such payments will be made by HMRC to pension schemes after 6 April 2015, this provision is repealed from that date.
3.Subsection (3) repeals subsection 188(6) FA 2004 which provides that for the purposes of sections 188 and 191 to 194 FA 2004, any part of the employer’s minimum payments that is recovered from the employee is treated as a member contribution and is relievable. Because no employers’ minimum payments have been paid since before 6 April 2012, no amounts will have been recovered from the employee, and this provision is no longer needed and is repealed from 6 April 2013.
4.Subsection (4) repeals subsection 190(5) FA 2004 which provides that the part of the employer’s minimum payments that is recovered from the employee is not to be included when calculating whether the individual has exceeded the annual limit for relief which is set out in the remainder of that section. Because no employers’ minimum payments have been paid since before 6 April 2012, no amounts will have been recovered from the employee, and this provision is no longer needed and is repealed from 6 April 2013.
5.Subsection (5) repeals subsection 196(5) FA 2004 which provides that employers’ minimum payments (other than any part recovered from the employee) are included as employer contributions for the purposes of that section, which covers tax relief for employer contributions. Because no employer will have paid a minimum payment since before 6 April 2012, this provision is no longer needed and is repealed from 6 April 2013.
6.Subsection (6) repeals section 202 FA 2004 which provides that HMRC will gross-up the minimum contributions it pays in respect of an individual who is contracted out of the state second pension through a personal pension scheme and will pay a specified amount into the National Insurance Fund. The amount payable to that fund is the difference between the grossed up amount of the minimum contributions to the personal pension scheme and the amount of the minimum contributions. HMRC will no longer pay minimum contributions to pension schemes from 6 April 2015. To be able to deal with payments that are made on or just before 5 April 2015, the provision for HMRC to make payments to the National Insurance Fund under section 202(6) FA 2004 (and those in sections 202(1) to (4) which are used to calculate those payments) is extended to 6 April 2016. It will however not be needed from that date.
7.Whilst section 202 FA 2004 is largely repealed from 6 April 2016, HMRC will continue to need the ability to recover overpaid minimum contributions that could be made sometime after 5 April 2016. Subsection 202(5) engages the powers of recovery contained in section 30 of the Taxes Management Act 1970, by way of regulation SI2005/3450. As a result, section 202(5) is to be repealed by Treasury Order.
8.Subsection (7) repeals subsection 233(2) FA 2004 which provides that minimum payments including any amounts recovered from the employee are not included when calculating the individual’s pension input amount for the purposes of the annual limit on pension contributions tax relief. As no minimum payments have been made since before 6 April 2012, this provision is no longer needed and is repealed from 6 April 2013.
9.Subsection (8) inserts new subparagraphs (2A) and (2B) into paragraph 5 of Schedule 29 FA 2004 (short service refund lump sum). Under the short service refund rules, where a lump sum which exceeds the total of the member’s contributions to the scheme is paid the excess is an unauthorised payment on which the member and the scheme administrator are liable for tax charges. The wording inserted into paragraph 5 Schedule 29 by this subsection ensures that incentive payments and age-related rebates of National Insurance contributions paid to schemes by HMRC, and amounts of minimum payments recovered by the employer from the member prior to abolition, continue to qualify as member contributions. As sections 188(3)(c) and (6) are repealed (see paragraphs 2 and 3 above), these amendments are necessary to clarify the position in relation to the limit on a short service refund lump sum paid after 6 April 2013 where the relevant contributions were paid before 6 April 2012. These provisions take effect from 6 April 2013. The legislation permitting incentive payments was repealed by Pension Schemes Act 1993 but claims for incentive payments were permitted up to 5 April 2001, and these sums could still form part of a member’s lump sum. Reference here puts the treatment of these sums beyond doubt.
10.Subsection (9) repeals paragraph 14(2) of Schedule 36 FA 2004 which provides that minimum payments, including any amounts recovered from the employee, do not count as relevant benefit accrual under paragraph 13(a) of Schedule 36. Relevant benefit accrual results in loss of enhanced protection. Because no minimum payments will have been made since before 6 April 2012, this provision is no longer needed and is repealed from 6 April 2013.
Background
11.Pensions Act 2007 and Pensions Act 2008 amended the legislation governing contracting out of the state second pension to bring into effect the abolition of contracting out through a defined contribution (money purchase) pension scheme from 6 April 2012.
12.The pensions tax legislation, which is mainly contained in FA 2004, takes account of the fact that contracting out through a defined contribution pension scheme is possible.
13.The pensions tax legislation is now being amended to remove the provisions which are no longer needed and make any further consequential changes. This keeps the tax legislation up to date and removes possible causes for misunderstanding or confusion.
14.The pensions tax provisions which relate to contracting out through a defined benefit (salary related) scheme are not affected by this section.
15.Some of the provisions take effect from 6 April 2013, as explained above. Other provisions will continue to have effect until 5 April 2015 or 5 April 2016. This ensures a sufficient period of time to deal with adjustments to an individual’s tax relief where these necessarily have to be made at a later date. From 6 April 2015, any outstanding adjusting payments will be made to the individual rather than the scheme. By 6 April 2016, HMRC will have made all necessary payments to the National Insurance Fund in respect of minimum contribution payments that are made on or soon before 5 April 2015. The relevant pensions tax provisions will therefore be switched off accordingly.
