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HMRC internal manual

Pensions Tax Manual

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Member benefits: pensions: protected pension age: loss of a protected pension age

 

Glossary PTM000001
   

 

Loss of protection due to employment after taking benefits
Loss of protection due to employment after taking benefits: protected pension age below age 50
Loss of protection due to employment after taking benefits: protected pension ages 50 to 54
Loss of protection due to employment after taking benefits between age 50 to 54: re-employment conditions

Loss of protection due to employment after taking benefits

Paragraph 22(7)(b) Schedule 36 Finance Act 2004

Where the entitlement to a protected pension age arises from membership of a retirement benefits scheme or deferred annuity contract (for example a section 32 policy) before 6 April 2006, the protected pension age will be lost if the individual is employed by certain persons. This condition also covers the situation where those rights have subsequently been transferred as part of a block transfer to a personal pension scheme.

The employment restriction applies where benefits are taken after 5 April 2006. It does not apply where benefits were taken before that date.

The type of restriction depends on whether the individual’s protected pension age on 5 April 2006 is to an age:

  • below 50, or
  • from age 50 to age 54.

Whichever age group the protected pension age falls in, protection is lost where the main purpose (or one of the main purposes) for early entitlement to benefits using a protected pension age is to avoid paying tax or national insurance contributions. A pension will be unauthorised until reaching normal minimum pension age.

Loss of protection due to employment after taking benefits: protected pension age below age 50

Paragraph 22(7)(b), (7A) and (7J) Schedule 36 Finance Act 2004

An individual with a protected pension age loses that protected pension age if:

  • they take their benefits, and
  • they are employed by a sponsoring employer in the scheme under which the benefits are paid, and
  • they are connected with that sponsoring employer.

‘Connected’ has the meaning given in section 993 Income Tax Act 2007 - see PTM027000.

So an individual becoming entitled to (taking) benefits before age 50 can stay in employment with their employer, or become employed by another sponsoring employer in the scheme, as long as the member does not meet the rare circumstance of being connected with their employer.

Example 1

A footballer may take benefits at their protected pension age and continue to play for, or be employed in a non-playing capacity with, any Football League club as long as they, for example, do not own or control the club.

Example 2

Subject to the rules of the Armed Forces Pension Scheme, an individual may become entitled to benefits from that scheme and be employed in the Armed Forces after becoming entitled to benefits, e.g. if the individual is re-called to the Armed Forces.

Protection is also lost where the main purpose (or one of the main purposes) of taking benefits early using a protected pension age is to avoid paying tax or national insurance contributions. A pension will be unauthorised until reaching normal minimum pension age.

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Loss of protection due to employment after taking benefits: protected pension ages 50 to 54

Paragraph 22(7)(b) and 22(7B) to (7J) Schedule 36 Finance Act 2004

Once the individual reaches the normal minimum pension age of 55, the restrictions cease to apply.

Protection is lost where the main purpose (or one of the main purposes) of taking benefits early using a protected pension age is to avoid paying tax or national insurance contributions. A pension will be unauthorised until reaching normal minimum pension age.

Protection is lost if after taking benefits the individual is employed by one of the following employers:

  • An employer who employed the individual in the six months before benefit entitlement arose, and who was also a sponsoring employer in the scheme under which benefit entitlement arose in that six-month period.
  • Any person connected with the employer described in the previous bullet point. Note that under this condition the person employing the individual does not need to be a sponsoring employer.
  • Any sponsoring employer in the pension scheme under which benefit entitlement arose that is connected with the individual.

‘Connected’ has the meaning given in section 993 Income Tax Act 2007- see PTM027000.

For the avoidance of doubt, this requirement means that the individual must cease all employments with such employers at the time they take their benefits. If they remain in any employment with these employers, they will lose their protected pension age and their pension will be unauthorised until they reach normal minimum pension age.

If the individual later returns to employment with the employer, then their protected pension age is lost from the date they are re-employed unless they meet one of the four re-employment conditions. The four re-employment conditions are set out in more detail under the headings below but broadly are:

  • compulsory recall by the Armed Forces
  • a break in employment of at least six months
  • a break in employment of at least one month and scheme rules provide that benefits may be abated
  • a break in employment of at least one month and the re-employment is materially different.

If the individual is not employed by any of the employers listed above the individual does not have to meet any of the four re-employment conditions.

Example

Andy becomes entitled to benefits from an industry-wide pension scheme on 7 April 2010 aged 54 in respect of his employment with Employer 1 Ltd. On 8 April Andy becomes employed by ABC Ltd. As this company is not a sponsoring employer in the industry-wide scheme and is not connected to Employer 1, Andy will not lose his protected pension age.

Andy could also have gone to work for Employer 2 Ltd. Employer 2 Ltd is also a sponsoring employer in the industry-wide pension scheme. However because Employer 2 Ltd is not connected either to Andy or Employer 1 Ltd, and did not employ Andy in the 6 months before 7 April 2010, Andy would not lose his protected pension age by becoming employed by Employer 2 Ltd.

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Loss of protection due to employment after taking benefits between age 50 to 54: re-employment conditions

Paragraph 22(7)(b) and 22(7D) to (7I) Schedule 36 Finance Act 2004

An individual who takes benefits when they are:

loses their protected pension age from the date they are re-employed, unless they meet one of the four re-employment conditions. These conditions are described below.

Once the individual reaches the normal minimum pension age of 55, these employment conditions cease to apply.

Recall by the Armed Forces

An individual will not lose their protected pension age where that individual became entitled to benefits from the Armed Forces Pension Scheme after age 49 and is later subject to a compulsory recall. A compulsory recall is defined as permanent service:

  • under Part 4 or Part 5 of the Reserve Forces Act 1996
  • under a recall or call-out order made under the Reserve Forces Act 1996
  • having been called out or recalled under the Reserve Forces Act 1980, or
  • because of any other call-out or recall obligation on an officer.

A break in employment of at least six months

If the individual is not employed after taking their benefits by any of the employers mentioned above within the six months after becoming entitled to benefits, they do not lose their protected pension age regardless of any subsequent employment.

A break in employment of at least one month and scheme rules provide that benefits may be abated

An individual taking benefits from a public service pension scheme who, after one month following becoming entitled to benefits, becomes employed by any of the employers mentioned above will not lose their protected pension age if their scheme pension is liable to be reduced by abatement. The pension does not have to be actually reduced, just liable to abatement.

For example, Judy takes benefits from public service scheme X. After 1 month, Judy returns to work for Employer X but for reduced hours. Judy’s pension and new pay level are tested by the scheme to see if her pension should be abated. Judy’s pension does not need to be reduced, but because it was tested for abatement and could have been reduced, Judy keeps her protected pension age for the benefits in payment.

A break in employment of at least one month and the employment is materially different

An individual taking benefits who, after one month following becoming entitled to benefits, becomes employed by any of the employers mentioned in the 3 bullet points above will not lose their protected pension age if the new employment is materially different in nature. A simple change in hours will not be a materially different employment. To be a materially different employment the duties and/or the level of responsibility in the new employment must be different from those in the old employment.

This condition no longer needs to be met six months following the individual becoming entitled to benefits.