Employer-financed retirement benefits schemes: schemes created by the payment of cash inducements
Note - This guidance does not relate to payments made by a registered pension scheme (see EIM74014)
[Notice: the guidance on this page should be read with the notice at the top of EIM15015]
An employer/third party may offer to pay lump sums to employees and/or former employees who are members of the employer’s registered pension scheme. In return the employee/former employee exchanges or surrenders all or some of their rights under the registered pension scheme, thereby reducing the employer’s future liability for the scheme’s funding. Such offers have been made in a number of circumstances including:
- in connection with a transfer from one type of registered pension scheme (normally a defined benefit scheme) to another type of registered pension scheme (e.g. a defined contribution scheme or a personal pension scheme)
- in connection with the surrender of rights under the current registered pension scheme (e.g. the right to future non-statutory pension increases).
Whilst the facts of each case need to be considered on their own merits, where the employer/third party makes a cash inducement offer, the arrangement under which the offer is made will normally create an employer-financed retirement benefits scheme (see EIM15020). This is because, where the offer is accepted, the payment can constitute a relevant benefit (see EIM15021) on the following grounds:
- payments made to existing employees and to former employees [who have left the employment other than by retirement] are paid ‘in anticipation of retirement’, and
- payments made to retired former employees are benefits provided ‘in connection with past service’.
This results in the payments being chargeable under section 394 ITEPA.
However, where as part of the arrangement, an employer meets the cost (directly or indirectly) of the provision of advice by an independent financial adviser to either its current employees or former employees who are deferred members of the employer’s registered pension scheme this cost is not regarded as a relevant benefit. This is because the advice does no more than provide assistance to the employee in deciding how to respond to the cash inducement offer so it is not considered to be a benefit provided ‘in anticipation of retirement’.
The position regarding the tax treatment of cash inducement payments was clarified in a HMRC announcement on 24 January 2007. Transitional arrangements were put in place for certain cases where the offer to make a payment to an individual was made before 24 January 2007. In cases where it is claimed either that these transitional arrangements apply, or that the payment of such sums does not constitute an employer-financed retirement benefits scheme please refer the case to Pension Scheme Services (Technical), FitzRoy House, Castle Meadow Road, Nottingham NG2 1BD.