IFAs advising on bulk S32 transfers ALERT!

I attach article from pension expert, drawing attention to some alarming news on buy out schemes….

Trustees must watch out for buyout tax implications

By Angus Peters | August 20, 2020

Defined benefit trustees have been urged to be on their guard against a new interpretation of tax law that could see certain members hit by unexpected tax charges on buyout.

Pensions lawyers have become aware that HM Revenue & Customs now considers the full buyout of a scheme, where individual annuity policies are issued to members, could invalidate their enhanced or fixed protection.   Enhanced protection was introduced in 2004 for people who would be affected by the newly introduced lifetime allowance. If savers had already accumulated more than the allowance, they could gain protection from shock tax charges, provided they did not accumulate any more pension or make certain transfers.

This was followed by fixed protections, available for those immediately impacted by the LTA’s reduction in 2012, 2014 and 2016.

Now, lawyers warn that the UK taxman considers scheme buyouts to void members’ protections in certain circumstances.  “An argument has arisen that when a pension scheme buys out, that’s an impermissible transfer,” said Hywel Robinson, head of the London pensions practice at Clifford Chance and chair of the Association of Pension Lawyers. 

The APL disagrees with HMRC’s interpretation of UK legislation but the small number of members impacted means a court appeal is unlikely, despite the apparent contradiction in the system.

HMRC maintains that this interpretation is nothing new, raising the prospect that buyouts already completed could have voided, or could void in the future, members’ protections.   A spokesperson said: “HMRCs guidance on transfers, including buyouts, has not undergone any changes and none are currently planned.  “If an individual has enhanced protection, fixed protection, fixed protection 2014, fixed protection 2016, or protection of a pension age below 55 a transfer may cause them to lose this protection under certain circumstances.”

HMRC publishes guidance on transfers including buyouts in its pensions tax manual.

Workarounds do exist for the problem, which only affects a small percentage of DB members.

“It’s only people whose benefits are already in payment under the scheme that’s being bought out, and then it only affects members if they have got protection and haven’t brought benefits under another scheme into payment,” Mr Robinson said.

He said that contacting potentially affected members might be a workaround.

Another might be for insurers to initially assign individual policies to the trustees, before the board then issues them to members. Some sponsors may simply stop their derisking journey at full buy-in, where the risks of a DB scheme have been fully insured by a bulk annuity, but this policy still sits on its books as an asset corresponding to its liabilities.

“It shouldn’t be necessary and people may not have thought it was necessary in the past,” Mr Robinson said. “I suppose going forward, some schemes may not be aware it’s an issue.”

Advice is essential

Whether this tax quirk will hold up the progression of UK DB’s derisking drive remains to be seen.  Several industry insiders told Pensions Expert they are aware of schemes grappling with the issue, although it would not necessarily block buyout.

Sammy Cooper-Smith, co-head of business development at Rothesay Life, said the bulk annuity insurer is “aware of schemes at the moment who believe that they are able to issue individual policies”, but echoed the warning for trustees to be alert to the issue.

with thanks to Pensions Week