Regulations have been laid before Parliament that would allow pension schemes that are winding-up to, in some circumstances, reduce members’ pensions without attracting tax charges.

Under the Finance Act 2004, unauthorised payments by registered pension schemes attract a tax charge. A pension paid by a scheme will only be an authorised payment if it meets certain conditions. One of these conditions is that the scheme may not reduce members’ pensions, except in limited circumstances. However, no express exemption was made for a pension scheme that is winding-up to reduce members’ pensions by reason of it having insufficient assets to continue paying the pension at the same rate. The new regulations will make it clear that such a reduction will not cause the pension to be treated as an unauthorised payment.

The new exemption will not apply if the reduction is part of an avoidance arrangement.

The new regulations will come into force on 1 July 2009, but have retrospective effect from 6 April 2006.