Taxation of Pension Schemes

20 March 2007 Taxation of Pension Schemes Consultation Response Document Issued by: 2 nd Floor Government Office Buck s Road Douglas IM1 3TX

Index Page 1. Introduction...3 2. Consultation...3 3. Executive summary...4 4. Qualifying Recognised Overseas Pension Schemes (QROPS)...4 5. Complexity of legislation...5 6. Tax relief for contributions...6 7. Annual allowance...6 8. Lifetime allowance...8 9. Tax relief for non-earners...9 10. Tax-free lump sum...9 11. Triviality...10 12. Concurrency...10 13. Recent developments in other countries...11 14. The quantification and taxation of a pension...11 15. Compulsion to purchase an annuity...12 16. Retirement age...13 17. Flexible retirement...14 18. Pension fund investments...15 19. Administration...16 Appendix 1 ESC Triviality...17 Appendix 2 Concurrency...20 2

1. Introduction The current general system for the taxation of pensions comprises three aspects: 1. tax relief in respect of contributions into a pension scheme, subject to certain limitations; 2. tax exempt growth of the pension fund, and; 3. taxable pension payments at retirement (although a certain tax-free element is allowed). For many years this approach has been seen by government as proving key incentives to encourage saving for retirement. Throughout this document the following abbreviations will be used: 1970 Act means the Income Tax Act 1970 1978 Act means the Income Tax (Retirement Benefit Schemes) Act 1978 1989 Act means the Income Tax Act 1989. Income tax legislation governing occupational pension schemes in the Isle of Man is contained in the 1978 Act. Part 1 of the 1989 Act covers personal pension arrangements and section 50B of the 1970 Act covers international pension schemes. The 1970 Act is important for a further reason, as where pension schemes cannot be granted exempt approved status by the Assessor for any reason, the contributions to them are not subject to tax relief and income received by the fund is taxable under the general provisions of the 1970 Act. Each piece of legislation sets out the criteria upon which the Assessor will give approval to a pension scheme (or withdraw approval once given); including quantification of the pension, tax-free lump sums, contributions and tax charges in certain circumstances. Each Act also gives the Assessor a degree of discretion; although again, usually subject to further associated criteria. Currently, Manx statute aims to ensure that members of approved pension schemes receive a pension for life on retirement, rather than simply providing members with a savings fund. 2. Consultation Treasury wishes to thank the people and organisations who offered their views on the taxation of pensions in the Isle of Man during the six week consultation period in the autumn of last year, and can now set out a number of proposals, using for ease the same headings as used in the consultation. 3

3. Executive summary Treasury intends to update the system for the taxation of pension schemes and pensions in the Isle of Man. Any changes will be initially to the existing Taxes Acts and will be delivered via a Pensions Bill later this year. It is the intention of Treasury that the new system will be modern and will allow people more options in respect of pension provision than they have at present, but that it will also continue to facilitate the movement of people and their pension arrangements to the Isle of Man. The key proposed changes are: to change how the maximum amount of tax relief on pension contributions is determined, primarily by introducing an annual limit that is not directly linked to earnings; to introduce a new form of allowance that permits non-earners to make pension provision; to permit pension schemes to pay a 30% tax-free lump sum to members on retirement, and to define how this is calculated; to bring into Manx law the commutation of trivial pension funds into taxable lump sums; to allow concurrency of membership of occupational and personal pension schemes; to remove the compulsion of schemes to purchase annuities in certain circumstances, and to introduce more flexibility in how benefits can be drawn from the fund at retirement; to increase the minimum age at which retirement benefits can be drawn to 55; to relax the link between a person s date of retirement and the drawing of relevant benefits, including the pension tax-free lump sum; to clarify the rules in respect of the investments by pension schemes that are permitted; to allow self-certification of tax approval of pension schemes in certain circumstances. 4. Qualifying Recognised Overseas Pension Schemes (QROPS) The UK adopted new rules on 6 April 2006 ( A-Day ) relating to the transfer of pension funds and benefits out of a UK scheme into an overseas pension scheme or arrangement. These rules replaced, and therefore cancelled, the reciprocal transfer agreement that had been in place between the Isle of Man and UK. The new rules require registration of an Isle of Man scheme with HMRC as a QROPS, before a tax-free transfer from the UK can take place. Transfers from the UK to schemes not having QROPS registration are allowed, but are taxed by HMRC. 4

QROPS approval is dependent on a number of factors, including; 1) that the scheme or arrangement is open to persons resident in a territory in which the scheme or arrangement is established; 2) that the scheme is regulated; 3) that the scheme is recognised by, or registered with, the local tax authority; 4) that tax relief is provided in respect of contributions and the relevant earnings are not exempt from tax; 5) that all or most of the benefits paid by the scheme to members who are not in serious ill-health are subject to taxation; 6) that 70% of the funds transferred must be retained in order to provide a pension for life; 7) that the pension benefits must be payable no earlier than normal retirement age; 8) that the pension, once payable, must be taxed by the local tax authorities. It is important that Manx pension schemes can get QROPS status, as the ability to transfer pension funds and benefits makes it easier for employers to attract key personnel and for the Island to attract high net worth individuals. The decision to move to the Isle of Man by both key personnel and high net worth individuals will be influenced by their being able to transfer accumulated benefits into a Manx pension scheme. The UK considers modern double taxation agreements to include articles (e.g. anti-discrimination and exchange of information) that allow pension schemes to obtain QROPS status without having to satisfy the tests listed above. The 1955 Isle of Man UK double taxation agreement does not include the relevant articles and so scheme providers must ensure that the QROPS tests are satisfied and reporting obligations are observed. 5. Complexity of legislation The A-Day changes were dubbed pension simplification by the UK Treasury, but many observers have expressed the opposite view. In reality, UK pension providers have to look at many different pieces of law when determining the rules applicable to a particular scheme. Pre-A-Day law continues to apply to schemes approved before 6 April 2006 (e.g. preservation of tax free lump sum), whilst post-a-day scheme approval is under the Finance Act 2004 (supported by many different Regulations). The issue is further complicated when a transfer takes place from a pre-a-day scheme into a post-a-day scheme. In the Isle of Man, pension providers have been able to rely on the littlechanged 1978 Act for occupational schemes and the 1989 Act for personal 5

pension arrangements. Treasury s view is that the 1978 and 1989 Acts, together with the primary charging provisions contained in the 1970 Act, should be retained until we carry out a Tax Acts consolidation, but amended in order to update the taxation of pensions system. The amending legislation will be contained in a Bill that will be passed to the Branches of Tynwald later this year. 6. Tax relief for contributions Tax relief for contributions to a pension scheme (whether by the employer or the employee) is an incentive to make pension provision. None of the respondents to the consultation felt that relief should be withdrawn. There was a call for additional relief to be given, for example by granting relief on contributions into UK schemes or by guaranteeing relief at the 18% tax rate. One respondent believed that tax relief for some employers who contribute to their employees pension schemes had been lost following the introduction of the 0% rate of income tax for companies. Relief on contributions into UK schemes can be given, but only if that scheme receives the requisite Isle of Man approval. Guaranteeing relief at 18% is feasible, but difficult to achieve and could be costly. The 0% rate of corporate income tax has not led to a complete loss of tax relief for employers. Relief is still available, albeit within the Distributable Profits Charge (DPC) system. A company paying contributions on behalf of its employees can deduct them from profits when computing the DPC. Under QROPS point 2 above, it is clear that tax relief on contributions to approved pension schemes is a key test. Withdrawing tax relief on contributions would inhibit Manx schemes from receiving transfers from UK schemes. Treasury considers that the taxation of pensions system in the Isle of Man must retain the concept of tax relief in respect of members and employers contributions. 7. Annual allowance Occupational schemes and personal pension arrangements are subject to different maximum allowable levels of contributions. Employees in an occupational scheme approved under the 1978 Act can claim tax relief on contributions up to a total of 15% of their remuneration for the year, whereas the relief on contributions into a personal pension scheme approved under the 1989 Act are (dependent on the members age) limited to between 17½% and 40% of the member s net relevant earnings for the year. Net relevant earnings are an individual s gross earnings from a given source less any deductions falling to be made from those earnings. The percentage applying 6

to relief in respect of contributions to personal pensions rises with age and where the maximum annual contribution limit has not been exhausted, unused relief can be carried forward and used in a later year. In each Act definitions of remuneration and net relevant earnings are provided, and establish what can and cannot be taken into account in the computation of relief available to the member. Employers also receive tax relief on contributions that they make on behalf of their employees. Contributions are allowed as an expense of the business, reducing the taxable profit or, as the case may be, the distributable profit subject to the DPC. The 1978 Act also allows employers to make additional contributions other than an ordinary annual contributions (e.g. where schemes are found to be under-funded), but in such cases the relief may be spread over more than one year. Contributions into approved schemes can come from a number of different sources, including: 1. from the employer 2. from the member 3. from the DHSS 4. from other schemes via transfers of accumulated benefits (including overseas schemes and arrangements). Some respondents to the consultation said that the current contribution limits are too low. However, the level of tax relief and, ultimately, the level of income tax payable by the member must be considered carefully by Treasury, as both may affect national revenue. Contribution limits in the UK have changed considerably after A-Day. The concept of net relevant earnings has been retained, but only in order to define a cap for relief on contributions, where other limits (annual allowance, see below) have not been exceeded. The new limits are known as the annual allowance and the lifetime allowance. Contributions into pension schemes can now be made without limit, but the related tax relief is limited and contributions in excess of the annual and lifetime allowances are subject to a tax charge. Relief on contributions is limited to the higher of 100% of the member s net relevant earnings or 3,600 (this figure is also considered later under the heading Tax relief for non-earners ), subject to an overall maximum equal to the annual allowance for the year. In the UK the annual allowance has been set at 215,000 for 2006/07. Contributions may be made in excess of that limit, thus bolstering the fund, but the excess suffers tax at a rate of 40%; effectively obliging people to 7

keep within the limit. The annual allowance limit applies to the aggregate of contributions paid by members and employers into any pension scheme during a tax year. The UK has already committed to increase the annual allowance by 10,000 per year for each of the next five years. It will reach 255,000 by 2010/11. The consultation response in the Isle of Man indicated that there was a high degree of support for introducing an annual allowance here. At the employer level, the introduction of an annual allowance would be a restriction on the current position. Contributions are currently limited to the amount of profit, so if the profit of a business is 1 million the contribution into a pension scheme for a single member is allowed to be up to 1 million. Treasury proposes to introduce an annual pension scheme contribution allowance; prescribed by regulations requiring Tynwald approval. The annual allowance will represent the maximum contribution into a pension scheme that will qualify for tax relief, but restrictions will exist where a person s net relevant earnings are less than the amount of that allowance. 8. Lifetime allowance In addition to the annual allowance discussed above, lifetime limits have also been introduced in the UK. The lifetime allowance has been set for the next five years. It is 1.5 million for 2006/07 and will rise to 1.8 million in 2010/11. If the lifetime allowance is exceeded, a tax charge is levied on excess contributions. The allowance is not scheme specific, and if an individual is a member of more than one pension scheme the total of contributions made to all schemes needs to be established when considering whether it has been exceeded. The majority of respondents to the Isle of Man consultation did not support the introduction of a lifetime allowance; with only three being in favour. The lifetime allowance was seen as a complicated process affecting only a small percentage of individuals. If Treasury wished not to introduce a lifetime allowance, the impact on revenue would be small at the point contributions are made as the major factor affecting revenue is the annual allowance. On the other side of the equation, the absence of a lifetime allowance would allow the member to accumulate greater benefits on retirement, resulting in a higher pension and higher income tax payments at that time. Treasury does not propose to introduce lifetime allowances at this time. 8

9. Tax relief for non-earners Currently, only individuals with relevant earnings are able to contribute to tax approved pension arrangements in the Isle of Man. The majority of respondents to the consultation supported allowing non-earners to contribute to pension schemes. People on low income can also be disadvantaged by the current rules. Such people may find that net relevant earnings-related limits make appreciable saving for retirement difficult. The consultation response favoured introducing a new form of allowance, available to those individuals who have little or no employment income but are in the economically active age range. There would be no requirement to have relevant earnings and this change would encourage people to make provision for their retirement who, previously, would have been barred from setting up a pension scheme. Low and non-earners may not necessarily see this form of allowance as beneficial because the payment of a pension from an approved scheme may potentially reduce means tested benefits; the member therefore, may not ultimately be better off. The introduction of a low or non-earner pension contribution allowance would be beneficial to those people who have gaps in their employment, e.g. parents taking time out to look after children and mature students, as they would be able to continue contributing to a pension scheme or arrangement during the gap. Currently an absence of net relevant earnings would bar those individuals from making provision for retirement. Treasury proposes to break the link between remuneration and net relevant earnings and pension schemes for low and non-earners and allow the payment of contributions into approved pension schemes up to a prescribed annual limit. Tax relief would then be available in respect of that contribution. 10. Tax-free lump sum All respondents to the consultation supported permitting the payment of taxfree lump sums from pension schemes on retirement. The 1989 Act limits tax-free lump sums: in the case of personal pensions to 25% of the fund value (up to a maximum of 150,000) and in the case of occupational schemes by reference to the final remuneration and years of service, again limited to an effective 150,000. Before 1989 it was possible to be a member of a scheme that would allow the payment of a tax-free lump sum greater than 25% of the fund or greater than 150,000. Preservation of the pre-1989 benefits was permitted at that time and comment has been made that continued preservation of benefits should be maintained in the future. 9

Preservation of existing benefits has also been allowed in the UK; such schemes can continue to pay higher tax-free benefits but only if the scheme remains unchanged. If the scheme funds are transferred into a new scheme, the protection afforded to the original scheme is lost. One respondent argued that preserved benefits should be retained in the Isle of Man, even following a transfer into a new scheme. Treasury supports preserving existing benefits, but considers that this preservation should not survive the transfer of pension funds from one scheme to another. Whilst the adoption of rules allowing the payment of a 25% tax-free lump sum out of any type of pension scheme was supported by those responding to the consultation, some said that the percentage should be increased to 30% (the maximum permitted by the UK when applying for QROPS). Treasury proposes to increase the tax-free lump sum allowance to 30%, coupled with a change of definition. The UK QROPS regulations do not actually permit the payment of a 30% tax-free lump sum, but require 70% of the UK tax-relieved scheme funds to be used to provide a pension for life. It would appear prudent to include such a definition in any changes that Treasury introduce. 11. Triviality Trivial commutation or triviality deals with those situations where the pension fund at the date of retirement is so small that it is not cost-effective to administer the payment of the pension or obtain an annuity. In those circumstances, it is permissible to forego the pension that should result from the scheme and pay a taxable lump-sum to the member. Triviality is a concept that has had statutory backing in the UK for many years. In the Isle of Man, the Assessor applies discretion on a case by case basis, and Treasury intends now to bring triviality commutation into statute. Appendix 1 is a draft Extra Statutory Concession that will be presented to Tynwald shortly and that provides guidance when dealing with triviality cases. It allows for any number of trivial commutations to take place, provided that the total pension benefits payable across all schemes and arrangements do not exceed 15,000. However, the Extra Statutory Concession will be only an interim measure. It is intended that the Pensions Bill should provide statutory backing for triviality in the Isle of Man. 12. Concurrency A member of an occupational pension scheme cannot also contribute to a personal pension scheme, unless it is an Additional Voluntary Contribution (AVC) scheme or a Free Standing Additional Voluntary Contribution (FSAVC) 10

scheme. Concurrency would allow a member to contribute to both an occupational scheme and to a personal pension scheme at the same time. The consultation response proposed allowing concurrency. Treasury propose to allow concurrency. A draft Extra Statutory Concession is shown at Appendix 2 which, if supported by Tynwald, will allow for concurrency where a member of an occupational scheme wishes also to contribute to a personal pension arrangement. The concession is drafted in line with current contribution limits (i.e. 15% of net relevant earnings), but it is intended to incorporate concurrency rules in the Pensions Bill based upon the new annual allowance. 13. Recent developments in other countries The consultation document referred to changes in pension legislation elsewhere, making particular reference to new tax exemptions in Gibraltar. Exemption from income tax may be popular to some, but as mentioned earlier in this paper, pension fund transfers from the UK to the Isle of Man would not be possible if ultimately, the pension payable to the member was exempt from Manx income tax. The number of pension fund transfers from the UK to the Isle of Man is significant. Modern pension schemes include rules allowing transfers into, or out of, the scheme; it is important that the ability to transfer funds from UK schemes is maintained, as the loss of transfers could seriously impact on employers who need to bring new key employees into the Island. Treasury considers the continued taxation of pension income in the Isle of Man to be essential. 14. The quantification and taxation of a pension Pension schemes are of two main types - defined benefit schemes that set out the level of benefits payable on retirement and defined contribution schemes that set out the contributions into the fund, from which the maximum pension return will be determined. Defined benefit schemes are currently unpopular with providers and employers, and there is a worldwide trend to wind up or close these schemes to new members. Defined contribution schemes are more popular and provide more certainty that appropriate funding will be available at retirement age to ensure that relevant benefits are payable to members. The maximum benefits that can be provided by a defined benefits scheme are currently set out in statute and scheme rules mainly adhere to those limits. None of the respondents to the consultation raised concerns about the method of calculation of pension benefits payable on retirement (other than the quantification of the tax-free lump sum that was considered earlier). 11

One respondent did make reference to situations where an individual seeks to draw down all of the accumulated benefits in one go, indicating that he was unable to support the concept. Legislation has been in place for many years that allows accumulated pension benefits to be extracted in special circumstances; subject to a tax charge. Treasury believes that it is appropriate to maintain that position. Other than tax-free lump sums (discussed under the previous heading), no changes are proposed to the calculation of pension benefits payable by defined benefit schemes. 15. Compulsion to purchase an annuity Personal pension arrangements approved under the 1989 Act require the purchase of annuity when retirement benefits are to be provided. Occupational schemes approved under the 1978 Act are not obliged to purchase an annuity when the member retires, although it is open to the trustees, with the agreement of the member, to purchase an annuity, rather than them paying the pension directly. Many responses to the consultation highlighted the practical difficulty of obtaining a suitable annuity at present. There has been significant coverage in the media regarding Norwich Union and its withdrawal from the Island. A significant part of the Norwich Union business in the Isle of Man was in the annuity market; both annuities related to existing Norwich Union pension arrangements and annuities purchased using funds arising in other approved pension schemes. The reducing choice of annuity providers in the Isle of Man may result in more members needing to obtain annuities from UK insurance companies. Should that be the case, the annuity may be exposed to UK income tax which has the twin problem of reducing the tax base in the Island and possibly exposing pensioners to higher rates of tax than they have at home, in circumstances where full double taxation relief for the UK tax paid can not be given. The compulsion to purchase an annuity is thus a major issue in the Isle of Man. In addition to the practical difficulties associated with finding a suitable product, further comments during consultation included: 1) annuity rates fluctuate meaning that annuities are not always seen as representing value for money; 2) there are significant administrative costs associated with setting up and maintaining annuity payments; and 12

3) following the death of the member any remaining balance of fund is retained by the annuity provider and family members receive limited benefits. Annuities do provide a pension for life however and, should the member enjoy a long retirement, the insurance company is obliged to continue paying the annuity even though the original fund value may have been exhausted. Respondents expressed the view that it should not be compulsory to purchase an annuity and that legislation dealing with occupational and personal pension schemes should, as far as possible, include similar options. A number of people said that unpaid funds should be allowed to pass to surviving relatives and friends should the member die. Under UK post-a-day rules, purchased annuities are no longer compulsory and the member can consider various options on retirement. Other jurisdictions allow members to draw pension benefits directly from a trust, which in some situations could equal 100% of the fund. The amount drawn is taxed, whether as one payment or as regular payments. Funds remaining in the trust on the death of the member are then taxed, allowing the remaining balance to be paid over to named beneficiaries. Guernsey has the Retirement Annuity Trust and a review of their legislation has found many similarities to the 1989 Act. The key differences are that the Guernsey scheme requires the creation of a trust, allows up to 100% of the fund to be drawn directly and does not require the purchase of an annuity. There are attractions to this type of scheme, which is revenue-neutral; in that tax is paid regardless of how funds are drawn after retirement. However, the basic principle of a pension fund is to provide a pension for life, and drawing 100% of the fund in one transaction cancels the possibility of receiving a pension. If the member s circumstances were then to change, there may be a need to provide additional support through the state benefits systems. Treasury proposes that approved pension schemes in the Isle of Man should have the option to purchase an annuity, but that the purchase should not be compulsory. The Pensions Bill will also include options allowing relevant benefits to be drawn directly from the scheme or arrangement. Pensions drawn directly from the fund will continue to be taxable and trustees will have to account for that tax. 16. Retirement age The minimum retirement age for occupational and personal pension schemes in the UK will be increased from 50 to 55 from 6 April 2010. 13

To maintain QROPS registration in the future, overseas schemes (including Manx schemes) will have to restrict retirement benefits to members who have reached the age of 55. There are rules that allow for retirement at an earlier age: in cases where the member works in an industry where it is customary to retire earlier than 55, or in cases of serious ill health. Both apply in the Isle of Man and there is no intention to change that position. Occupational schemes in the Isle of Man usually include retirement at 60, but the Assessor can allow retirement at 50 on a discretionary basis. Personal pension schemes allow the purchase of an annuity at any time after the age of 50. Treasury recognises that some schemes will need to amend their rules to accommodate this change. 17. Flexible retirement Currently, pension benefits can only be taken on retirement, forcing an individual member to retire from employment before taking benefits from the pension scheme. The member can take up paid employment in a different field, but that may not suit his needs or the needs of the employer. Situations can arise where the member and employer would benefit from changes to working arrangements (e.g. reduced hours) but the member may not be able to adopt the change due to reduced income. Flexible retirement would allow the member to continue to work for his employer, whilst taking his pension benefits. This could be beneficial to the employer and to the member. This would not affect tax receipts adversely as the continuing payment of wages and the new payment of pension are both taxable. Many people can in effect already enjoy the benefits of flexible retirement, by returning to their place of work on a consultancy basis. Formal adoption of flexible retirement rules would give everyone access to options on retirement that previously did not exist. It may allow for better succession planning, allowing key employees close to full retirement to work alongside new staff. In addition, comment has been made that pension schemes should allow the payment of the tax-free lump sum, without the need to start payment of other pension benefits. This may be of benefit where the member has one-off costs (e.g. university payments for a child), but is not seeking retirement from work. Allowing the payment of a tax-free lump sum early would provide a significant benefit to the member. It would only be possible to exercise the option once and it could be restricted to persons who have achieved the normal retirement age. Treasury proposes relaxing the link between a person s date of retirement and the drawing of relevant benefits. Individuals and employers should be 14

able to reach agreement on a phased approach to retirement without statute forcing a particular approach. Treasury supports allowing the pension tax-free lump sum to be taken independently of other benefits; but only once, and not before the member s normal retirement date. In these circumstances, further tax-free lump sum payments will not be permitted from the scheme, even if the first lump sum was less than the maximum amount. 18. Pension fund investments The rules relating to the approval of pension schemes restrict certain types of investment. For example, if the scheme rules provide for investment in residential property (whether for capital appreciation, income generation or both) the scheme will not be approved. Similarly, investment in unquoted companies and some types of loan arrangement may cancel approval. If a scheme administrator wished to step outside those rules, an approach to the Assessor for clearance would be needed. If clearance was not obtained, but the investment went ahead, scheme approval would be lost. Comment was made during the consultation in relation to investment in residential property, but without a consensus. Some respondents supported the concept, others wished to restrict it to overseas residential property and others not supporting it at all. There was no significant comment on pension schemes being permitted to advance loans. Requests to the Assessor to allow loan arrangements are reasonably common, and the publication of rules would be beneficial to the, pension providers and to scheme members. Rules have been published in the UK and in Guernsey and, in the absence of Manx rules, are considered by the Assessor when a request is made. Currently, investment by some pension schemes in unquoted companies is not permitted unless clearance is received from the Assessor. Clearance on a discretionary basis has been allowed for limited investments in unquoted companies. Published guidelines would improve consistency in this area and consultation comments supported this. As the principal aim of an approved pension scheme or arrangement is to provide the member with a pension for life, Treasury ought to provide a regulatory framework that protects the fund and thus the member from reduction caused by inappropriate investments. Treasury proposes to publish further guidance in this area, but will consider further whether it should be statutory, or a statement of the principles affecting the exercising of the Assessor s discretion. 15

19. Administration Comments were made during the consultation supporting the flexible approach to pension taxation administration operated in the Isle of Man. Those responding to the consultation also called for simplification and reduced administrative burden. The UK A-Day changes have introduced a form of self-certification relating to scheme approval and QROPS registration. Many pension providers in the Isle of Man use standard deeds and rules when setting up new schemes and arrangements the only changes being to the name of the scheme, the members and one or more of the trustees. Self-certification may therefore be possible in the Isle of Man; allowing scheme providers to submit the standard deed and rules, declare that they are the standard documents and to obtain exempt approved status with immediate effect. Such a system would have to include provisions that allowed the withdrawal of approval where false statements were made or where non-standard deeds and rules were presented as standard documents. Treasury proposes to allow self-certification where pension providers use standard deeds and rules when setting up a new scheme or arrangement. The process will require notification to the Assessor that the new scheme has been set up, confirmation that the Insurance and Pensions Authority has authorised or recognised the scheme and that the new scheme is based on previously agreed standard deeds and rules. It is also proposed to give the Assessor the power to require exempt approved pension schemes to make a return in certain circumstances; e.g. when schemes are to be wound up or where funds are to be transferred from one scheme to another. 16

Appendix 1 ESC Triviality Government Circular No. XX/07 INCOME TAX EXTRA STATUTORY CONCESSION APPROVED PENSION SCHEMES TRIVIAL COMMUTATION LUMP SUMS Approved by Tynwald 2007 The Treasury has agreed the following Concession. 1. This Concession has effect in respect of the assessment year commencing on 6 th April 2006 and all subsequent assessment years until it is withdrawn. 2. This concession permits the trustees of any personal or occupational pension scheme which the Assessor of Income Tax has approved under the provisions of the Income Tax (Retirement Benefit Schemes) Act 1978 and the Income Tax Act 1989 to pay a trivial commutation lump sum to a scheme member. 3. For the purposes of this concession Pension fund means the total value of a member s entitlement held by the pension trustees to be used to pay a pension to the member. It includes the value of the member s crystallised and uncrystallised pension rights on the nominated date of commutation; 17

Trivial commutation lump sum is a lump sum or aggregate of lump sums from all the pension funds in which the member holds an entitlement that when paid:- i) does not exceed the commutation limit; ii) extinguishes the member s pension fund under the pension scheme. 4. The commutation limit is 15,000. 5. There is no restriction on the number of trivial commutation lump sums that may be paid, providing that the aggregate does not exceed the commutation limit. 6. The commuted amount paid will be liable to income tax. 7. Commutation of a pension that contains Protected Rights will only be permitted if the approval of the Department of Health and Social Security has also been obtained. 8. This concession is of general application, but it must be borne in mind that in a particular case there may be special circumstances which will require to be taken into account in considering the application of the concession. This concession will be withdrawn in any case where it can be seen that the concession has been or is intended to be subject to abuse. MADE Minister for the Treasury 18

EXPLANATORY NOTE (This note is not part of the Concession) Significant changes have been made to the pension legislation in the United Kingdom recently. The intention of this concession is to extend similar benefits available in the United Kingdom to Manx pension schemes. This concession allows pension trustees to make trivial commutation payments of up to 15,000 to a member in instances where the member wishes to cash-in a pension fund. A charge to income tax will be made on this payment at the individual s marginal rate in their assessment. 19

Appendix 2 Concurrency Government Circular No. XX/07 INCOME TAX EXTRA STATUTORY CONCESSION CONCURRENCY OF PERSONAL PENSION PLANS AND OCCUPATIONAL PENSION SCHEMES Approved by Tynwald 2007 The Treasury has agreed the following Concession. 1. This Concession has effect in respect of the assessment year commencing on 6 th April 2006 and all subsequent assessment years until it is withdrawn. 2. For the purposes of this concession Personal pension plan means an arrangement made by any individual to provide an annuity, income withdrawals or lump sums in accordance with the rules of the pension scheme and subject to the provisions contained within the Income Tax Act 1989; Occupational pension scheme means a scheme set up by an employer to provide its employees or members with a pension on retirement and subject to the provisions contained within the Income Tax (Retirement Benefits) Act 1978; 20

Net relevant earnings means an individual s gross earnings from a given source less any deductions falling to be made from these earnings in a year of assessment. 3. An individual may be a member of and contribute to both a personal pension plan and an occupational pension scheme concurrently without the requirement for separate sources of remuneration. 4. The maximum aggregate contribution that an individual may make to the personal pension plan and occupational pension schemes in operation is 15% of the individual s total net relevant earnings in a year of assessment. 5. This concession is of general application, but it must be borne in mind that in a particular case there may be special circumstances which will require to be taken into account in considering the application of the concession. This concession will be withdrawn in any case where it can be seen that the concession has been or is intended to be subject to abuse. MADE Minister for the Treasury EXPLANATORY NOTE (This note is not part of the Concession) Significant changes have been made to the pension legislation in the United Kingdom recently. The intention of this concession is to extend similar benefits available in the United Kingdom to Manx pension schemes. This concession allows an individual to make contributions to both a personal pension plan and an occupational pension without the need for separate sources of earnings. The overall maximum contribution that an individual may make is 15% of the net relevant earnings. 21