Pensions Update 150 - Pre A-Day Avoidance

The content of this page is based on our understanding of how pensions worked before A-Day, the 6 April 2006, and is provided for reference only.

In the run up to A-Day (6 April 2006) HM Revenue and Customs (previously the Inland Revenue) are concerned that people might be abusing existing rules that allow people to fund for the same period of service with an employer twice using a section 590 scheme.

Normally, occupational pension schemes are approved under section 591 of the Income and Corporation Taxes Act 1988 - these are called ‘Discretionary Approved Schemes’. However controlling directors of investment companies are barred from membership of such schemes. Instead, they can become members of schemes approved under section 590 of the Income and Corporation Taxes Act 1988 - these are known as ‘Mandatory Approved Schemes’. In order to become a member of a ‘s.590’ scheme, a prospective member must have schedule E remuneration. Membership of a ‘s.590’ scheme is not restricted to controlling directors of investment companies, but employees who are not such controlling directors would normally be better placed in a ‘s.591’ scheme.

Where a member has personal pension benefits held in respect of the same, or a previous employment, these can be ignored for the purposes of maximum benefits available from a ‘s.590’ scheme - effectively service can be pensioned twice.

Example

A director with long service with his company opts out of pensionable service and transfers his benefits under a section 591 approved scheme to a personal pension scheme. The section 591 scheme then winds up and a ‘s.590’ scheme is set up to provide additional benefits, backfunded for the years which had already been fully funded in the s591 scheme. The effect of this is to get around the benefit limits applying to occupational schemes approved under discretionary practice in an artificial way.

HM Revenue and Customs are concerned that some people may pay large amounts of money into ‘s.590’ schemes in the run up to A-Day so that they can then apply for an increased lifetime allowance on A-Day. This is illustrated below:

A director has been a member of his company’s occupational pension scheme for 40 years. It is fully funded and is currently worth £1.45 million.

The director would like to pay as much as possible into his pension plans before A-Day so he transfers his fully funded occupational pension plan into a personal pension plan and then sets up a ‘s.590’scheme. When the maximum funding quote is done for the ‘s.590’ scheme the benefits that have been transferred to the personal pension plan can be ignored, but his total service with the company can be used.

On A-Day the value of the directors personal pension and his ‘s.590’ scheme is £1.65 million so he applies for primary protection. Primary protection can be used by people who have a benefits value on A-Day which exceeds the standard lifetime allowance of £1.5 million. It will be possible for somebody to register their own personal lifetime allowance. This will be expressed as a primary protection factor which will be used to calculate the member's personal lifetime allowance at vesting date. HM Revenue and Customs has said that they have no objection to people legitimately paying large contributions into their pension plans before A-Day if they can. But what they will not tolerate are people who use ‘s.590’schemes to backfund the same period of service twice just to increase what they can pay in and the value of their pension benefits before A-Day. If they find that this has been done they will consider withdrawing approval from the scheme.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.