New regulations will allow pension schemes which are winding up to reduce members’ pensions without attracting tax charges. The regulations will come into force on 1 July 2009 with retrospective effect to 6 April 2006.

Under the Finance Act 2004, if a registered pension scheme reduces a scheme pension, the payment of that pension will be an unauthorised payment and will attract a tax charge, except in limited circumstances. The new regulations will extend those limited circumstances to allow an occupational pension scheme to reduce a scheme pension while the scheme is being wound up if the reason for the reduction is that the scheme assets are insufficient to pay the pension at the former rate.

The new exemption will not apply, however, if the reduction is part of "avoidance arrangements". These include schemes, arrangements and understandings of any kind (whether or not legally enforceable) which have the purpose, or a main purpose, of increasing the member’s entitlement to a lump sum on which there is no liability to income tax.

The regulations can be found here.