Do you currently advise international assignees working in the UK and participating in a “correspondingly – accepted” International Pension ...

Do you currently advise international assignees working in the UK and participating in a “correspondingly – accepted” International Pension Plan (IPP)? If you do then you will know that these individuals, who will all be non-UK domiciled, gain significant UK tax advantages in relation to pension contributions paid into this type of arrangement.

In particular, provided that the assignees are employed by a non-UK resident employer, contributions paid into an IPP are free of UK tax and NIC. They are also fully tax deductible for the employer. There is a further condition that the benefits available under the IPP must be accepted by the Inland Revenue as being reasonable given the length of service and the salary levels of the individuals concerned. However, this still allows for a fairly generous level of funding. Indeed, the great advantage of IPPs is that the very prescriptive limits that apply to UK approved pension scheme arrangements (e.g. the maximum earnings limit, currently £102,000 for 2004/05) which variously restrict the level of contributions and benefits (except for pre-1989 members) do not apply to IPPs.

A further advantage of IPPs is that they will be established (and tax resident) outside the UK, so that non-UK investments can roll up free of UK income tax and capital gains tax. In addition, provided the conditions of Extra-statutory concession A10 (ESC A10) are satisfied (in particular, with regard to length of the assignee’s overseas service in the employment relative to overall service), lump sum benefits receivable by an employee out of the IPP (i.e. on retirement or death) are not charged to UK income tax or NIC. There is also a statutory relief whereby foreign pensions paid out but not remitted to the UK are not taxable on a non-UK domiciled individual, even if he is tax resident here at the time.

However, as part of the UK Government’s commitment to simplify the UK pension tax regime from 6 April 2006 (A-Day), there are some significant changes that will apply to the tax position for IPPs. The changes represent a mixture of good and bad news dependent on the circumstances of the international assignee. In particular, from 6 April 2006 the tax privileges that apply to correspondingly-accepted IPPs will be governed by a new system of “migrant member relief” (MMR) and new rules will apply to qualify for these privileges. The position is set out in some considerable detail in Schedules 33 and 34 to Finance Act 2004, although there may be further changes before A-Day.

Under the new rules, it will no longer be necessary to be non-UK domiciled to benefit from MMR which will simplify matters and broaden the appeal of IPPs. Similarly, there seems to be no requirement to be employed by a non-UK resident employer, as is currently the position. On the other hand, it will be necessary to have been participating in the IPP before an individual arrives in the UK which will mean that it will not be possible to “sort things out” some weeks or months later.

There will also be a requirement for the scheme manager to undertake to provide prescribed information to the Inland Revenue in a number of defined circumstances (e.g. when members take benefits under the plan). The scheme must also be regulated as a pension scheme in the country when it is established. However, a key restriction will be that the lifetime allowance (fixed at £1.5 million for 200/07 and rising to £1.8 million in 2010/11 unless a higher personal limit applies) and the tax free annual contribution limit (£215,000 for 2006/07) will apply for MMR in a “similar” way as it will apply for all UK registered pension schemes from 6 April 2006. “Similar” because it would seem from the (somewhat impenetrable) legislation, and recent discussions that we have had with the Inland Revenue, that the lifetime allowance will only apply to contributions made after A-Day and not to the absolute value of the fund on retirement.

In any event, though, this will mean that where contributions made after A-Day do exceed the assignee’s lifetime allowance then, on retirement, a 55 per cent tax charge will arise on the amounts paid to him or her as a lump sum. And, consistent with this, the Inland Revenue have confirmed to us that ESC A10 will be withdrawn from 6 April 2006 so that the present position (see above) whereby benefits can often be taken free of UK tax will no longer apply. This is definitely not good news. Whilst for administrative purposes the individual can elect to pay tax at a point earlier than retirement e.g. when he or she leaves the UK and based on the amount of contributions that exceed the individual’s lifetime allowance, this does nothing to ease the tax cost. So for numbers of individuals who will find themselves above their lifetime allowance on retirement these changes will have a very significant (and adverse) impact when compared to the present favourable position under correspondingly-accepted IPPs.

This leaves aside the question of overseas tax in the country where the individual is resident on retirement, although the new legislation provides that any overseas tax charge on benefits can be offset against the UK charge. Whilst there are complex transitional rules that will apply to IPPs, it will be highly-paid assignees who will be affected from 6 April 2006 and who will, in effect, be subsidising the cost of broadening the base of the MMR to others. That is, of course, unless employers consider alternatives to reduce their assignees’ exposure - and potentially their own exposure (if they would otherwise “gross-up”) to the tax charge when benefits are received.

The solution may lie outside the MMR regime. KPMG have developed an International Retirement Plan (IRP) which is designed to replicate many of the features of existing correspondingly-accepted plans but with much greater flexibility than will apply under the proposed MMR rules. Further, the IRP addresses the tax cost that will arise in relation to any MMR-based scheme where the lifetime allowance has been exceeded. We believe that the IRP will have greater application than merely to international assignees, in that it will have a part to play for UK-based individuals where they are also adversely affected by the lifetime allowance.

Employers should now be weighing up the effect of the pension changes on their international assignees and determining what their strategy will be approaching and beyond A-Day. They should communicate with assignees on what the changes are, how they may impact and what assignees might want to do before A-Day arrives. In conclusion, it seems clear that whilst MMR apparently widens the base of participation relative to correspondingly-accepted arrangements, this will come at a price in terms of the limit on relief for those who will exceed the lifetime allowance. For them life will be more difficult and a new strategy will be required. In the meantime, though, assignees should make the most of the current regime … because it will be all change from 6 April 2006!