TRUSTEES NEED TO BE AWARE OF POTENTIAL BUYOUT TAX EFFECTS ON SCHEME MEMBERS
Trustees need to be aware of potential buyout tax effects on scheme members Defined benefit pension trustees need to be mindful of an interpretation of tax law which could see members hit by unexpected tax charges on buyout of a pension scheme with an insurance company. Until fairly recently, buying out benefits was a well-trodden path involving a reasonably straightforward process which it was believed did not adversely affect members’ tax status. However, hm revenue & customs (hmrc) now takes the view that the full buyout of a defined benefit scheme can in fact result in some members losing their fixed protection. A variety of different protections were introduced in recent years as the lifetime allowance was reduced, in order to protect those whose pensions had already, or were likely to, exceed the lifetime allowance at the time. Fixed protection gives those who benefit from it a lifetime allowance which is substantially higher than the current standard lifetime allowance - fixed protection was set at
£1.8 Million in 2012, £1.5 Million in 2014 and £1.25 Million in 2016. This provides a significant benefit in terms of taxation for members, but comes subject to certain conditions. These valuable protections can be lost in certain situations, such as where there’s any benefit accrual, or where a transfer which is not a “permitted transfer” is made. Hmrc has now taken the view that a buyout may not be a permitted transfer for a pensioner member, which could therefore cause the member to lose fixed protection. Deferred members and other forms of protection are not affected in the same way. The original purpose of introducing fixed protection for members was to protect savers who had accumulated more than the reduced lifetime allowance from unexpected tax charges. Regulations specifically provide that enhanced protection, and fixed protection for deferred pensioners is not lost on a buyout. The position of pensioners with fixed protection appears to be an anomaly as it is difficult to think of any sensible justification for the law to treat them differently to other members on a buyout.
page 12
