Unauthorised payments overturned by Finance Bill 2007

Amendments to the Finance Bill 2007 will allow employers to reduce payments of incapacity pensions and will relax the rules around the time limits in which lump sum death benefits must be paid.

The changes, which have been†published in the latest stage in the development of the Finance Act 2007, are intended to counter some of the problematic tax changes made in the Finance Act 2004 which came into effect on 6 April 2006. It is particularly focused on amending the concept of unauthorised payments introduced by the 2004 Act, which incur tax penalties payable by both employers and scheme members.

The amendments stated that, under the terms of the Finance Bill 2007, pension schemes will be able to reduce payments of incapacity pensions, which was not permitted under the Finance Act 2004. This had resulted in some schemes having to choose between incurring additional costs in order to continue paying full incapacity pensions to a member who had partially recovered, or stopping the pension altogether even if they had not returned to full health. It has†also meant that some†schemes have been less willing to grant incapacity pensions in the first place because they are aware that they will be unable to reduce them at a later date. The 2007 change will be a return to the previous legal position.

Under the Finance Act 2004, any lump sum death benefit must also†be paid within two years of the member’s death in order to be counted as an authorised payment. The exemption from inheritance tax also applied for a period of two years only. This proved problematic in cases where schemes do not become aware of a member’s death until a later date. the Finance Bill 2007’s†amendments will allow schemes to make this payment two years from either the earlier of the date on which they knew of the member’s death or the date on which they should reasonably have known of the member’s death.

A spokesperson from law firm Linklaters said: “The Bill is important in dealing with some of the problems arising out of the Finance Act 2004 unauthorised payments regime.”

They added†it is thought the Bill will apply all the changes retrospectively.