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Home Office circular 7 / 2006

Police pensions: ‘A-day’ and changes to Police Pensions Regulation 1987

  • Broad subject: Police service
  • Issue date: Thu Apr 06 00:00:00 BST 2006
  • From:
    Crime Reduction and Community Safety Group (CRCSG) - Policing Policy Police Human Resources Unit (PHRU)
  • Linked circulars:
    No linked circulars
  • Copies sent to:
    Chief Officers of Police (England and Wales), Clerks to the Police Authorities
  • Sub category: Police pensions
  • Implementation date: Thu Apr 06 00:00:00 BST 2006
  • For more info contact:
    John Gilbert - 020 7035 1880
  • Addressed to:
    Chief Officers of Police (England and Wales)

Police pensions: ‘A-day’ and changes to Police Pensions Regulation 1987

The purpose of this circular is:

a) to explain the changes which are being made to the Police Pensions Regulations 1987 and the Police Pensions (AVC) Regulations 1991, including those consequential upon the A-day changes and upon the new financing arrangements for police pensions.
b) to instruct police pensions administrators on the action they need to take before 6 April (‘A-day’) to comply with the changes to tax legislation which come into force on that day;
c) to provide consolidated information about the effect of ‘A-day’ on high earners; and
d) to notify you that the provisions for injury awards have been moved to a separate SI, the Police (Injury Benefit) Regulations 2006, with effect from 6 April 2006.

This circular does not cover the New Police Pension Scheme (NPPS), which will come into effect on the same date (6 April). This will be covered in a separate circular. The details of the financing changes, which came into effect on 1 April, are set out in HOC 54/2005.

1. Changes to the Police Pensions Regulations 1987

1.1 A number of changes need to be made to the current Police Pension Scheme, by amendments to the Police Pensions Regulations 1987. These fall into two main groups: those consequential upon the new tax regime for pensions (the’ A-day’ changes), to come into effect from 6 April, and those required by the new financing arrangements for police pensions, which will come into effect from 1 April.

1.2 The details of these changes are set out in Annex A (the ‘A-day’ changes) and Annex B (the financing arrangements changes).

1.3 The changes to the 1987 Regulations will be made by amending Regulations which will be circulated under cover of a separate circular in due course. In the meantime, the changes should be made administratively with effect from 6 April 2006 (except for the financing changes, which should be made with effect from 1 April).

1.4 We are taking this opportunity to give advance notice of a number of other minor corrections or changes that will be included in forthcoming SIs. In a number of cases these involve bringing the relevant provision in the 1987 Regulations into line with the corresponding provision in the draft NPPS Regulations (i.e. what will become the Police Pensions Regulations 2006). This does not change the general principle that those officers who remain in the current scheme will be unaffected by the new scheme, but there are a number of points where both schemes are meant to operate in the same way and it would be inequitable not to make the corresponding improvement to the 1987 Regulations. These changes, which will not be implemented as from 6 April 2006, are set out in Annex C. It is expected that they will come into force in June.

Commutation of pension for lump sum

1.5 One particular change which administrators should note is the change to the time limit for deciding whether to commute part of pension for a lump sum. We have been advised by HMRC that after ‘A day’, to avoid a tax charge, decisions to commute must be made before a pension comes into payment. We are making the necessary amendment to Regulation B7 (See Annex A, Paras A.5 to A.9).

1.6 This change requires action in the following areas:

  1. HMRC's advice means that PPS administrators will need to contact urgently any former active and deferred members who are in receipt of a pension [after 5 October 2005] but who did not decide to take any lump sum at that time, to warn them that if they are planning to commute any pension they need to give formal notice by 5 April 2006.
  2. Administrators will also need to ensure that any active or deferred members retiring with a pension between now and 6 April are warned that they have only until 5 April to give formal notice of their commutation decision if they wish to avoid tax charges.
  3. From 6 April administrators should make it clear to members of either the current or the new pension schemes that decisions to commute pension to lump sum (or, in the case of the new scheme, to exchange lump sum for pension) have to be taken before the date of retirement.
  4. Particular care is needed to fix a date for retirement which allows the officer to commute in cases where an officer is ill-health retired, or is dismissed or required to resign with an entitlement to an ordinary pension.

2. ‘A-Day’

2.1 Pensions administrators will be aware that, with effect from 6 April 2006, a new tax regime for pensions comes into effect. Pensions administrators have already been provided with some guidance on the effect of these changes and with the text of a letter to send to officers at Superintendent and above (who are most likely to be affected). However, for completeness, guidance on a number of issues in connection with A-day is reproduced here.

General information about A-day

2.2 Annex D gives information about the new allowances & limits and related changes that will come in from A-day. This is based on information from HM Revenue and Customs (HMRC). The HMRC on-line guide can be found at:

www.hmrc.gov.uk/manuals/rpsmmanual/index.htm (new window)

Duties on pensions administrators and police officers

2.3 Following A Day there is an obligation on you as pensions administrators to notify HMRC of the occurrence of certain events.

Pensions administrators need to make an Event Report to HMRC annually, they will need to notify HMRC if the following have occurred during the year:

  • An unauthorised payment has been made
  • A lump sum death grant has been paid to a survivor that is more than 50% of the deceased officers lifetime allowance
  • An ill-health pension is withdrawn because the officer is fit to return to work
  • An officer has crystallised their benefits and in doing so has exceeded the lifetime allowance
  • An officer has relied on enhanced protection or an enhanced allowance to avoid exceeding the lifetime allowance
  • A pension commencement lump sum is paid which is more than 7.5% but less than 25% of the lifetime allowance for that year
  • A police officer transfers out and transfers their pension to a recognised overseas scheme that is not a registered pension scheme
  • A lump sum is paid to the survivor of a retired officer who died when over the age of 75 as this would constitute an unauthorised pension

Where an officer breaches the annual allowance the onus is on them to inform HMRC of the tax payable. They should do this via a self assessment form. Whilst this is their responsibility it would be helpful if you, as scheme administrators, could take the lead in ensuring they are aware of their obligations.

The scheme member must tell the scheme administrator if:

  • they wish to rely on an enhanced lifetime allowance: they should provide their administrator with the HMRC reference number issued in connection with this
  • they wish to rely on enhanced protection: they should provide the administrator with the HMRC reference number issued in connection with this

Administrators must notify the officer when:

  • a benefit crystallisation event has occurred which resulted in a lifetime allowance charge being levied. They must be informed of:
    • the chargeable amount that has arisen as a result of the benefit crystallisation event
    • details of how the chargeable amount has been calculated
    • the amount of tax due
    • details of whether the scheme administrator has already accounted for the tax or intends to account for it

Administrators must also provide retired officers with an annual statement of the percentage of their lifetime allowance that has crystallised since 6 April 2006 in relation to the Police Pension Scheme. Please see http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM12200080.htm (new window) for guidance on this.

Registration requirements

2.4 The PPS is currently classed as a “relevant statutory scheme” by HMRC and, as such, will automatically be registered by HMRC on 6 April. Registered pension schemes are required to appoint a scheme administrator to carry out tax obligations on behalf of the scheme.

2.5 In common with schemes such as the Local Government Pension Scheme and the Firefighters’ Pension Scheme, the PPS is administered by the relevant employers, namely Police Authorities. In response to concerns raised with them, HMRC have brought forward new legislation (The Registered Pensions (Splitting of Schemes) Regulations 2006) to permit scheme administrator responsibilities to be delegated from the Centre.

2.6 To meet the requirements of the new legislation, schemes that wish to be treated as “split schemes” had to register with HMRC by 17 February 2006. The Home Office has registered the PPS as a “split scheme” and will be regarded by HMRC as the “split scheme administrator”. A further requirement is for the details of the administrators to whom responsibility is delegated, known as ”sub scheme administrators” under the new legislation, to be provided to HMRC also by 17 February 2006. The information required is as follows:

  • name of the police authority
  • address
  • e-mail
  • telephone number

2.7 The Home Office has collated this information and passed it to HMRC.

2.8 In keeping with previous guidance on IDRP the Treasurer to the Police Authority is the official responsible to the Police Authority for the administration of the Police Pension Scheme.

2.9 As a separate exercise, we have been advised by HMRC that police authorities will need to supply them with the name, address, e-mail and telephone number of the practitioners or authorised agents with day to day responsibility for tax matters. This will enable HMRC to give the necessary on-line access to the tax system. This information should be provided direct to HMRC as soon as possible. We would not expect this person to be the Treasurer, but the Pensions Administrator, who would consider the first level of IDRP applications.

Primary & Enhanced protection

2.10 Annex E provides technical notes for administrators on the valuation of PPS benefits at 5 April for primary protection purposes. Annex F describes the potential impact of the new tax regime on high earners in the PPS.

3. Benefits for death and injury attributable to police service

3.1 Under the new tax rules, attributable death and injury benefits cannot be part of the Police Pensions Regulations as you do not have to be a member of the Police Pension Scheme to receive them. They have therefore been removed and put in Police (Injury Benefit) Regulations. This is described in more detail in Annex G.

4. Authorised Payments – Arrears of Pension

4.1 As discussed previously, from A-Day a pension scheme needs to make payments that are Authorised payments as described in the Finance Act 2004, otherwise they will attract a tax charge for both the member and the scheme. This means that the Benefit Crystallisation Event (BCE) needs to occur before the officer in question retires so as to satisfy the requirement that an officer becomes entitled to his or her pension and lump sum at the date of retirement.

4.2 It is recognised that this may present problems in cases where the pension needs to be changed for reasons such as court order, a Pensions Ombudsman determination or awards where the “beginning date” for pensions increase is earlier than the date the pension starts to be paid. These are reasons that readily came to mind. If there are others that you think we should consider, please let us know.

4.3 HMRC have agreed that the provisions of the Finance Act 2004 and the regulations that were announced on 7 November 2005 would, for example, permit arrangements for paying arrears of pensions and lump sums and interest for delay such as are set out below. HMRC have therefore made regulations to cover the payment of arrears of pension so that they are authorised payments. It effectively allows for a second BCE. The main features are that:
a) a backdated, higher rate of pension can be paid as a separate pension and the member will become entitled to this (in terms of the definition of entitlement under s165(3) FA04) once the amount has been determined (eg where a retrospective pay award has been applied). However, schemes must ensure that the revised award is documented as a separate pension for tax purposes even if it is aggregated for the purposes of paying it;
b) in this case, because the member has become entitled to a scheme pension, it will come within Benefit Crystallisation Event 2 and the member will have an entitlement to a Pension Commencement Lump Sum in connection with that pension;
c) a reasonable amount of interest can be paid in respect of the late payment of that pension lump sum (and for that matter the arrears of pension) as a scheme administration member payment (under s171 FA04); and
d) the actual arrears of higher rate pension (that is from the date a member could have started to draw these higher rate benefits) to the date of entitlement (in terms of S165(3) FA04) come within the regulations that HMRC have made in order to make pension arrears "authorised member payments" (under s164 FA04).

4.4 The key adjustment in HMRC's advice is that the date of entitlement under tax law for the revised amount of entitlement is the date the revision was finalised by the scheme.

4.5 However, that is not the date of entitlement under scheme rules or for the purposes of the Pensions Increase Act 1971.

4.6 The scheme pension can be aggregated so there is no need for a separate scheme pension to cover arrears of pension and lump sum. Neither does anything in the HMRC provisions change the deemed date for pensions under the PIA.

4.7 Advice about separate pensions refers to there being a separate pension for tax purposes - the second BCE. HMRC policy colleagues have agreed that there is no requirement for separate pensions under scheme rules.

4.8 The above means that the 3-month pension lump sum rule for revised awards bites from the date the scheme determines the revised award. We assume that the scheme cannot determine that until it has the necessary information from the various sources. Assuming that you would be paying arrears of pension and lump sum together, we hope there should not be a problem with the 3-month rule.

4.9 On arrears, you can now pay arrears of revised award as well as of the original pension. And, of course, the concerns about awards of interest etc should have been dealt with by the recognition that these can be paid as scheme administration member payments (SAMPs). NB: SAMPs are taxable.

4.10 The first revised award under the new tax rules would be a BCE no earlier than 6 April 2006, assuming that the scheme determined the revised amount on that date. That would presumably give three months in which to pay the extra pension lump sum alongside arrears of pension.

4.11 More information is available in Annex H.

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