A technical issue under tax legislation has caused headaches for a number of pension schemes and employers involved in scheme mergers and other bulk transfer scenarios. This Law-Now considers a new statement from HMRC that outlines the Government's intention to resolve the problem.

The background

Late last year, HMRC issued a draft Order amending some provisions of the Finance Act 2004 that deal with the annual allowance (the maximum amount of pension saving an individual can have each year which benefits from tax relief).

One of the changes was an attempt to “fix” a problem which few knew existed: the interaction of the annual allowance with bulk transfers. The suggestion was that pension input amounts (pension savings counted against the annual allowance) might arise in relation to transferring members where transfer credits were in excess of the value of assets transferred (even where benefits in the receiving scheme were like-for-like). This would be a potential issue for all ‘underfunded’ schemes making a bulk transfer.

HMRC’s view sparked concern within the pensions industry. It raised fears that bulk transfers taking place before any correcting Order was made would trigger tax charges on members whose annual allowance limits were breached as a consequence. It also threw into doubt transfers which had already taken place: particularly as the annual allowance was slashed from £255,000 to £50,000 for the 2011/12 tax year, in which the present Finance Act wording on transfers came into force.

HMRC's statement

In a statement to industry representatives, HMRC promises to issue a revised draft of the Order “as soon as possible”. In the meantime, HMRC recognises that the issue is “causing difficulty” and so confirms that pension input amounts are not intended to arise in circumstances where:

  • there is a bulk transfer of members from one registered pension scheme to another as a result of an employer rearranging its pension schemes or as part of a business transaction;
  • the member’s benefit in the receiving scheme is the same as if it had remained in the original scheme (“mirror image”, although there may be a value test to accommodate some variation in benefits); and
  • the pension input amount would arise only because the transfer is ‘underfunded’ (i.e. the sums or assets transferred to the receiving scheme are not sufficient to support the level of benefits promised by that scheme).

In addition, the statement says that the Order will be retrospective, applying to pension input amount calculations for 2011/12 and subsequent tax years.

Conclusion

The confirmation that bulk transfers will not lead to annual allowance charges in the circumstances described above is welcome. We are aware of a number of reorganisations and mergers which had been hampered by the uncertainty that followed last year’s draft Order.

However, note that the forthcoming draft Order will still require scrutiny by Parliament, and there will only be complete clarity on the matter when the final Order is laid.