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HMRC internal manual

Pensions Tax Manual

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Annual allowance: pension input amounts: deferred members: general

Glossary PTM000001
   

 

Meaning of deferred member
Pre-6 April 2006 deferred members
Members with deferred benefits and continued employment link
Members joining a scheme on or after 14 October 2010 and then leaving
Cumulative increases
Partial crystallisation of deferred benefits
Revaluation rate for deferred members linked to continuing service
Members with continuing life cover
Members with continuing ill-health cover
Transferring in deferred benefits

Sections 230(5B, 5BA, 5BB, 5BC & 5C) and 234(5B, 5BA, 5BB, 5BC, 5BD, 5BE & 5C) Finance Act 2004

Note – for tax year 2015-16 there are transitional rules for calculating pension input amounts.  PTM058080 has more details.

Deferred member ‘carve-out’

An individual who under either a defined benefits or cash balance arrangement is:

  • a deferred member for the whole of the pension input period,
  • only a deferred member and then a pensioner member for the pension input period, or
  • a deferred member from the beginning of the pension input period until:

    • there is a recognised transfer from the pension scheme of all the sums or assets held for the purposes of, or representing accrued rights under, the arrangement in connection with the individual, and
    • after the transfer, no rights accrue under the arrangement (from which rights have been transferred) to (or in respect of) the individual during any remaining part of the pension input period

is treated as having no pension input amount (pensions saving) for that arrangement if the following conditions are met.

For the arrangement to be treated as having no pension input amount any increase in the member’s benefits under the arrangement cannot be more than:

  • the ‘relevant percentage’, plus
  • the ‘relevant statutory increase percentage’.

The meaning of ‘relevant percentage’ and ‘relevant statutory increase percentage’ is explained in PTM053920.

Note - for this purpose rights to a GMP do not have to be taken into account when considering the increase in the member’s benefits under the arrangement. Effectively, if either of the above conditions are met the rate of increase that must be given to the GMP can be ignored.

This is a two part test: is the member a deferred member (in the tax definition sense)? Is the increase more than is permitted under the legislation? Failing either limb of the test means the ‘nil’ pension input amount treatment does not apply, and changes over the pension input period in the members entitlement may use up annual allowance.

This is referred to in this guidance as the ‘deferred member carve-out’ or ‘carve-out’.

Note that certain deferred pensioners might count as having a nil pension input amount in an arrangement for a reason that is separate from the ‘deferred member carve-out’. The reason is explained below: in summary, it is because they became a deferred member (as defined for the purposes of tax rules) under the arrangement before 6 April 2006 and have remained a deferred member for tax rule purposes since then.

There is a further circumstance when a defined benefits arrangement which is under a deferred annuity contract might have a nil pension input (see PTM053940).

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Meaning of deferred member

A deferred member is defined by elimination. Such an individual must not be an active member or a pensioner member. In particular, an individual is an active member of a registered pension scheme if there are currently arrangements made under the pension scheme for the accrual of benefits to or in respect of the person.

This definition needs to be read in the context of a per-arrangement rather than per-scheme test for the annual allowance deferred member carve-out. The concept of ‘benefit accrual’ is therefore very important in this context.

Note that the definition of deferred member is a definition under the tax rules. Even if the rules of a pension scheme refer to an individual as a deferred member or deferred pensioner this does not necessarily make them one for the purpose of the tax rules.

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Pre-6 April 2006 deferred members

In order for the annual allowance provisions to apply to an arrangement of an individual, there must be a pension input period for that arrangement.

A pension input period in relation to an arrangement begins only if there is a ‘relevant commencement date’. For a defined benefits or cash balance arrangement, the relevant commencement date is the date on which benefits under the arrangement begin to accrue to, or in respect of, the individual. PTM052100 has details about when the first pension input period for an arrangement starts on or after 6 April 2011.

The annual allowance provisions do not apply to an arrangement where the member became a deferred member (as defined for the purpose of the tax rules) under that arrangement prior to 6th April 2006, and has remained so from then on.

There would not be a pension input amount to take into account for that arrangement. This is because a pension input period would not have started for that arrangement for as long as benefits do not accrue to, or in respect of, the member under that arrangement on or after that date.

Where a member became a deferred member (as defined for the purposes of the tax rules) before 6th April 2006, the following actions do not constitute benefits beginning to accrue within a defined benefits or cash balance arrangement (and so do not cause loss of deferred member status).

Where there is a change to the rate at which benefits are revalued in the deferred period, for example moving to a rate that includes as part of its mechanism an index based on RPI from an index based on CPI (so long as, where relevant, the change is not linked to continuing employment).

The member exercising on or after 6th April 2006 a retirement option granted (by letter or in the scheme rules) before 6 April 2006.

By contrast, where a member of a defined benefits or cash balance arrangement has had accrual under that arrangement after 5th April 2006 (so has a pension input period for the arrangement) and then became a deferred member and so has qualified for the deferred member carve-out, the actions outlined at bullet point 1 or 2 above could cause the deferred member carve-out to be lost. This is because the consequential increases to benefit calculations may exceed the increases permitted under the deferred member carve-out.

Note that it is important to identify that a ‘pre-6 April 2006 deferred member’ is indeed a deferred member of the arrangement for the purposes of the tax rules. See below for a range of situations where a member may have ceased to accrue retirement benefits but nevertheless not count as being a deferred member for the purpose of the tax rules since before 6 April 2006.

Where this happens, such that there is ‘accrual’ on or after 6 April 2006 in the arrangement, a pension input period will have started for the arrangement when that post-5 April 2006 accrual started, and the annual allowance provisions will apply.

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Members with deferred benefits and continued employment link

For a defined benefits arrangement an individual might have ‘deferred benefits’ to the effect that the amount of their pensionable service is no longer increasing. This might happen when an employer has given defined benefits for a period of time but has changed its pension provision for subsequent service to money purchase. If the individual’s pension rights are still based on their current salary and so they increase if they receive a pay rise (even though the length of service is not increasing for the purpose of the defined benefit) the individual is not a deferred member and so the deferred member carve-out does not apply.

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Members joining a scheme on or after 14 October 2010 and then leaving

The deferred member carve-out covers an individual joining a registered pension scheme after 14 October 2010 and then leaving. This is provided that the revaluation rate applying was in accordance with the rules for members at 14 October 2010 or the increase is no more than the allowable CPI increase.

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Cumulative increases

In many registered pension schemes, revaluation under the scheme rules is applied cumulatively only when the deferred member reaches the scheme’s ‘normal pension age’, or ‘GMP age’.

The deferred member carve-out can apply to such a cumulative increase. This is provided that the revaluation rate applying is in accordance with the rules that were in place on 14 October 2010.

Note - the revaluation of a GMP does not have to be taken into account and so automatically forms part of the carve-out.

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Partial crystallisation of deferred benefits

Where the carve-out applies in respect of deferred benefits under an arrangement that carve-out can continue to apply if there is a partial crystallisation of the deferred benefits during a pension input period. This is provided that the conditions for the carve-out continue to be met in relation to the remaining deferred benefits.

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Revaluation rate for deferred members linked to continuing service

In relation to an arrangement, a member might, for example, cease accrual of benefit by reference to pensionable salary on ‘Date 1’ and revaluation then applies at rates specified in the scheme rules as at 14 October 2010 but with one rate applying specifically while the individual remains in service with the current employer, and then once the individual leaves service (at ‘Date 2’) reverts to the revaluation that applies for other exits.

Where an employed member’s accrued pension rights increase at a rate that is higher than would have been the case had the member left the employer’s service, then that higher prospective entitlement arises solely in connection with employment and is considered an accrual. As such, the individual is not considered to be a deferred member and the deferred member carve out would not apply to the arrangement(s) in question. Specifically, in the example above, the individual would not be able to rely on the deferred member carve-out before Date 2.

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Members with continuing life cover

An employee continuing in the service of an employer might cease pensionable service and have revaluation as for leavers from employment generally but continue to have life cover under the scheme while an employee.

In these circumstances the employee could be an active member of an arrangement solely because the arrangement provides life cover. In most cases continuing life cover, itself, would not be a pension input amount. Nevertheless, the continuing life cover could constitute an ‘accrual’ of benefit and so make the member an active member for the purpose of the tax rules. This might happen, for example, where the continuing life cover is a defined benefit which is based on the employee’s salary at the time of death.

However, if the life cover is held within a separate arrangement to that within which the deferred pension is held, the existence of that life cover would not, in itself, prejudice the deferred member status in the other arrangement. Whether arrangements are separate will depend on the facts, based on the scheme construction.

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Members with continuing ill-health cover

An employee might cease accrual of pensionable service (but not actual service) in relation to an arrangement and have revaluation as for leavers from employment generally but continue to have ill-health cover.

For example, no further benefits might accrue in the normal course of events, in the sense that no further benefits build up by reference to further service and salary in relation to the amount of pension that had built up by the time the employee ceased accrual of pensionable service. However, if the member starts to suffer from a long term illness the scheme might grant an enhanced pension of either (a) the accrued pension paid immediately without reduction or (b) as (a) but uplifted to reflect prospective service.

An employee who has ceased accrual of pensionable service could still be an active member in relation to an arrangement solely because of the continuing ill-health cover. As in the life cover case described above, this could constitute an ‘accrual’ of benefit, depending on its nature. For example the level of ill-health cover could increase by reference to continuing service or salary. However, the continuing life cover might not create an actual pension input amount unless and until such time that the contingent event that triggers an actual benefit entitlement takes place.

If the ill-health cover provided for within an arrangement does not increase by more than revaluation linked to CPI (or the rate set out in the scheme rules on 14 October 2010) the deferred member ‘carve-out’ could still apply within that same arrangement.

In the event of the contingency that triggers an actual entitlement to the ill-health pension, the deferred member carve-out would not be prejudiced simply by the unreduced payment of the accrued deferred pensioner rights (even if those benefits would not have been paid unreduced had the member left employment).

If at the trigger event an actual entitlement arises under the ill-health cover and there is potentially a pension input amount at that time because the deferred member carve-out falls away there might still not be a pension input amount in relation to the triggering event. This might be the case if that event satisfies the severe ill-health conditions (see PTM051200).

As with ongoing life cover, if the ill-health cover does constitute accrual, but it is provided under a separate arrangement to that in which the deferred pension is held, the existence of the ill-health cover would not, in itself, prejudice the deferred pensioner status in the other arrangement. Whether arrangements are separate will depend on the facts, based on the scheme construction.

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Transferring in deferred benefits

An individual might qualify as a deferred member in relation to benefit rights held under an arrangement and in turn, if all of the other necessary requirements are met, qualify for the deferred member carve-out.

Those benefit rights might be transferred, by way of a recognised transfer, so that the same benefit rights are held under a different pension scheme in replacement of the benefit rights that had been held under the transferring pension scheme.

The grant of the replacement benefit rights under an arrangement under the receiving pension scheme as a result of the transfer would be an accrual of benefits to or in respect of the individual, even though there is no increase in benefit rights between those given up in the transferring scheme and those granted in the receiving scheme.

This means the individual would be an active member in relation to the grant of the replacement benefit rights. This would prevent the individual potentially qualifying for the deferred member carve-out for, at least, the pension input period for the receiving scheme arrangement in which the grant of the benefit rights occurs as a result of the transfer. However such an individual can remain a deferred member in relation to the receiving scheme arrangement provided that but for the grant of the replacement benefit rights as a result of the transfer, the individual would otherwise qualify as deferred member in relation to the benefits rights under the receiving scheme arrangement.

With effect from 28 January 2015, the test for whether an individual is a deferred member but for the grant of the replacement benefit rights as a result of the transfer is conditional on:

  • in the case of a ‘block transfer’, the increase in value of the benefits in the receiving arrangement in relation to the transfer is equal (or virtually equal to) the decrease in value of the benefits in the transferring arrangement (PTM053720 has more details about block transfers),
  • in the case of an individual transfer, the grant of replacement benefits in the receiving arrangement is funded solely by the amount of the transfer payment.