Following representations from the pensions industry the Government intends to provide regulations to prevent inadvertent tax consequences where a member’s scheme pension is reduced in the course of the winding-up of their pension scheme.
One of the conditions of a scheme pension is that it should be payable for life and should not be reduced once the member has become entitled to its actual payment, apart from in certain defined circumstances. One of these circumstances is where all of the scheme pensions being paid are reduced at the same rate.
HM Revenue & Customs have been made aware that this may not cover all situations where a scheme is winding-up, as not all of the pensions being paid to members may reduce. This means that some individuals may find that not only has their scheme pension been reduced, because there are insufficient funds to maintain the existing level of pension, but that this reduction renders the future pension as unauthorised payments.
The Government intends to provide through secondary legislation that reductions to scheme pensions in these circumstances will not be treated as unauthorised payments for registered pension schemes. To guard against abuse this will only apply if the pension scheme membership is above a certain size. This will ensure those members who are already suffering a reduction in pension due to the financial problems of their schemes will not also face an adverse tax treatment.
It is intended that these regulations will apply to any such reductions made in these circumstances since 6 April 2006.