Pension schemes: collective money purchase benefits
Published 21 July 2020
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Who is likely to be affected
Individuals where their employer decides to use a pension scheme that provides collective money purchase benefits.
Employers who decide to use a pension scheme that provides collective money purchase benefits.
Scheme administrators of employer-sponsored pension schemes where the employer has decided to use a pension scheme that provides collective money purchase benefits.
General description of the measure
This measure will enable collective money purchase pension schemes to operate as UK registered pension schemes, in the same way that existing UK registered pension schemes can operate, as set out in the Finance Act 2004.
Policy objective
The Pension Schemes Bill has introduced new legislation to allow collective money purchase pension schemes to operate in the UK. Changes to the tax legislation are necessary to enable collective money purchase pension schemes to operate as UK registered pension schemes, without the unintended tax consequences that arise when a scheme is not registered.
Background to the measure
In 2018, DWP consulted on delivering collective defined contribution pension schemes, now referred to as collective money purchase pension schemes. This new type of pension scheme would be less expensive for the employer to run and fund, share overall responsibility between scheme and members and be less administratively burdensome. The Pension Schemes Bill introduced legislation to allow this new type of pension scheme to operate in the UK, and this measure is needed because of the Pension Schemes Bill; it will change the tax legislation to allow this new type of scheme to operate as a registered pension scheme, alongside existing defined benefit and defined contribution registered pension schemes.
From April 2021 new legislation allowing collective money purchase pension schemes to operate in the UK is scheduled to take effect. This measure provides the changes to the tax legislation needed so that this new scheme can operate as a UK registered pension scheme. If these changes are not made, any payment the new pension scheme makes might lead to unauthorised payment charges for the scheme and member due to how collective money purchase schemes operate. It may also prevent a collective money purchase scheme from registering for tax purposes in the first place, meaning that tax relief would not be available, and the pension scheme could not be used for automatic enrolment purposes.
Detailed proposal
Operative date
The changes to the tax legislation will be effective from 6 April 2021.
Current law
The current pensions tax rules for registered pension schemes came into force on 6 April 2006 (A-day) and are set out in Part 4 of the Finance Act 2004.
The definition of a pension scheme is very wide because of the varied nature of the pension industry. There are no restrictions on what payments a registered pension scheme can make, but the Finance Act 2004 sets out the tax consequences of any payment.
The main benefit of a registered pension scheme is the availability of tax relief on member and employer contributions. FA04 has three controls on tax-relieved pension savings: the annual allowance; the lifetime allowance; and unauthorised payment charges. The scheme administrator must declare that members are not entitled to unauthorised payments under its scheme rules before a scheme can be registered. If a pension scheme cannot operate as a registered pension scheme, its members are unable to get tax relief on their contributions to the scheme.
Annual allowance and lifetime allowance limits and input are defined differently depending on whether the pension scheme provides a defined benefit (based on length of service and salaries) or money purchase benefit (based on the amount invested in an individual’s pension pot).
There are specific rules and tests on benefits taken from a registered pension scheme, and many of these work differently depending on whether they apply to defined benefits or money purchase benefits. For example, certain types of pension or lump sum are available as authorised payments as money purchase benefits only and vice versa. If benefits are paid that are not authorised, unauthorised payments charges of up to 55% on the member will apply.
Pension savings can be transferred free of tax while they are being built up provided they are transferred to another registered pension scheme (or, in some cases, a qualifying recognised overseas pension scheme) but there are additional requirements if a transfer is made when the pension is in payment.
Proposed revisions
Legislation will be introduced in Finance Bill 2020-21 to enable the new collective money purchase pension scheme to operate as a UK registered pension scheme. This will open up access to pension tax relief and certain exemptions that are available, for example, exemption from tax for certain lump sum benefit payments and lump sum death benefits.
The legislation will be published in draft on 21 July 2020.
Summary of impacts
Exchequer impact (£ million)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| - | nil | nil | nil | nil | nil |
This measure is not expected to have an Exchequer impact.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure ensures the new collective money purchase pension scheme can operate as a UK registered pension scheme and could impact individuals who are currently members of employer-sponsored defined benefit pension schemes, if their employer wants to change their pension scheme to the new type of scheme.
The new scheme will be operating as a UK registered pension scheme so there will not be any additional impacts on the individual. The individual will still receive tax relief on member and employer contributions and can continue to receive payments from the scheme. The individual will continue to have access to authorised payments, as well as the annual and lifetime tax-relieved savings limits.
Customer experience is expected to stay broadly the same because enabling the new pension scheme to operate as a UK registered pension scheme will not change when and how the individual will need to interact with HMRC. There is expected to be no impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts on groups sharing protected characteristics. Individuals will either move to this new UK registered pension scheme from an existing registered pension scheme and continue to receive the benefit of tax relief and authorised payments. Or they will be new to pension savings and begin to receive the benefit of tax relief and authorised payments.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on those pension scheme administrators and employers who decide to use a collective money purchase pension scheme. One-off costs will include familiarisation with the change and advising individuals affected. There are not expected to be any continuing costs.
This measure is not expected to impact on civil society organisations.
Customer experience is expected to stay broadly the same because enabling the new pension scheme to operate as a UK registered pension scheme will not change when and how a pension scheme will need to interact with HMRC.
Operational impact (£ million) (HMRC or other)
HMRC will need to make changes to its IT systems to support implementation of this measure. The costs of these changes is anticipated to be in the region of £2.5 million.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
This measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Beverley Davies on Telephone: 03000 512336 or email: pensions.policy@hmrc.gov.uk.