A change in the law to prevent annual allowance charges on mergers where benefits will remain unchanged

In the July 2013 edition of pensions pieces we explained how HMRC's approach on transfers of DB benefits from one scheme to another means that annual allowance charges can arise for members, even where their pension entitlements pre- and post- transfer do not differ.  New regulations to resolve this issue are expected to come into force in the near future.

Broadly, the issue stems from HMRC's current practice of assessing (i) the value of the assets transferred from the transferring scheme, compared with (ii) the value of the benefits to be provided for the member in the receiving scheme. If the benefits are greater than the assets (which will clearly be the case in a merger where the transferring scheme has an ongoing deficit), then the difference is deemed to be a pension input for individual member's tax purposes, which may give rise to an annual allowance charge for the transferring individuals.

HMRC has been seeking to amend the law to resolve this situation for many months now. Previous draft regulations published in November 2012 were shelved due to issues identified with them in consultation, in particular by the Association of Consulting Actuaries (ACA).  Finally, after a long delay, new draft regulations have now been published to deal with this problem, which will have retrospective effect from the tax year 2011-12 onwards. As yet the date these will come into force is undecided, but so long as there are no serious objections to the drafting, the regulations should be in force by the end of the year.

Under these draft regulations, a merger will not give rise to pension inputs for the purpose of the annual allowance where the value of the members' benefits in the receiving scheme is "equal (or virtually equal)" to the value of the benefits given up in the transferring scheme. It remains to be seen what is meant by "virtually equal", but this is sufficient where exactly the same benefits are being provided.

It is now clearly proposed that this amendment will be made to apply retrospectively, removing the annual allowance risk where mergers are carried out with mirror-image benefits being provided post-merger. Nevertheless, employers and trustees wishing to avoid any risk of members being subject to annual allowance charges as a result of a transfer from an underfunded scheme may wish to wait until the amending legislation comes into force before proceeding with a scheme merger.