Pre-Budget Report Comment

As part of our special focus on the Chancellor‘s Pre-Budget Report, Minerva decided to focus in on the three areas that would be of most interest to our clients.  These are:

Alternative Secured Pension (ASP)

Pension Term Assurance

Individual Savings Accounts (ISAs)

Alternative Secured Pension

ASP rules will be tightened from 6 April 2007, reducing the scope to pass on tax-advantaged pension savings.

The Pre-Budget Report details key changes to the ASP pension income rules including:

• Forcing pensioners to take an income; however, they will now be able to take more income under ASP than they were previously (an increase from 70% of GAD (Government Actuaries Department) up to 90%).

• Passing on an ASP fund to other scheme members on death (known as a “transfer lump sum death benefit”) will be treated as an unauthorised payment with potential tax charges of up to 70% - effectively making it prohibitive.

• Removal of ‘death guarantee‘ to pensions paid from an ASP.

• Scheme administrators can choose a charity to receive any ASP fund remaining on a pensioner‘s death if there is no existing charity nomination in place.

Similar changes will be made to stop pension funds being passed on using scheme pensions or other mechanisms on death after 75.  Her Majesty‘s Revenue & Customs (HMRC - formally Inland Revenue) will consult with interested parties before deciding on the details.  The ASP inheritance tax rules introduced by the Finance Act 2006 will stay in place, but HMRC will consider how they should interact with the new death benefit rules.  In summary, although ASP will remain suitable for, and attractive to, many people these changes will:

• stop tax-advantaged pension assets being left untouched after 75, and

• represent the death of the “family” pension scheme concept for passing on funds on death after 75.

Further details can be found on the HMRC website.

Pension Term Assurance

HMRC have expressed their view that ‘stand-alone‘ Pension Term Assurance policies are not being used in the spirit of the generous tax regime that has governed them.  Consequently, HMRC may change the rules for contract that go into force after 5 December 2006.

ISAs

Following the conclusion of the government‘s ISA review in November 2006 it is intended to make ISAs permanent beyond 2010. In addition to this there are a number of reforms proposed to the ISA regime.

Bringing PEPs within the ISA wrapper

• Currently there are different PEP and ISA reporting regimes and the intention is to bring PEPs within the ISA wrapper and align the rules for the two schemes.

• Qualifying investments currently allowed only under PEPs will be allowed under ISAs. For example, allowing investment trusts with rental income to be held under ISAs.

• Changes to the taxation of uninvested cash to be aligned to that currently applicable to ISAs.

• At a given future date all PEP accounts will become stocks and share ISAs and as such PEPs will cease to exist.

Remove the mini/maxi ISA distinction

• Savers will be able to contribute to a cash and stocks and shares component which can be with different providers.

• Overall limit remains at £7,000.

• Maximum £3,000 cash component and balance in stocks and shares (for example £1,000 cash with one provider and £6,000 stocks and shares in same or with another provider).

Child Trust Fund accounts to roll over into ISA accounts

• With the first Child Trust Fund accounts maturing in 2020 it is proposed to allow the funds held in these accounts to roll over into ISAs.

 Transfers from cash to stocks and shares ISAs

• It is proposed to allow funds held in cash ISAs subscribed in previous years to be transferred to the stocks and shares component of an ISA.

• This transfer will not affect the current year‘s investment limit.

In respect of the measures proposed the government is asking for responses from interested parties to comment on any practical difficulties in applying the new approach and suggest how these can be overcome. Comments are required by 31 January 2007. The Government proposes to introduce these reforms as soon as practicable.

[This Pre-Budget Report feature was compiled using information obtained from HMRC, BBC Online, Standard Life & Canada Life]