More Recurring Themes

Having looked at some issues arising from the Budget 2023 in my last couple of articles, this time I will try to avoid the Budget and look at some other recurring queries that have recently been raised by Aries members. 

How does the deferred member carve-out work?

The deferred member carve-out for members with salary related benefits is a regular source of queries.  One recent query concerned a case where the scheme had ceased accrual of Defined Benefits in March 2022 and had moved all active members into a money purchase arrangement under the same scheme.

The question was simply whether, as the member was still accruing money purchase benefits under the scheme for the 2022 / 23 tax year, does the deferred member carve-out apply in respect of their defined benefits under the scheme?

The deferred member carve-out is legislated for in Section 234 (5B) - (5BE) of the Finance Act 2004, with subsections (5B) and (5BA) being relevant here.

Broadly, subsection (5B) says that the member’s Pension Input Amount is nil where subsection (5BA) applies, provided that the value of the member’s “relevant rights” under the arrangement do not increase across the Pension Input Period (PIP) by more than a certain percentage (the “relevant percentage” plus the “relevant statutory increase percentage”).

For the purposes of this query, subsection (5BA) applies where, throughout the PIP, the member is

• a deferred member of the pension scheme that the arrangement is under, or
• would meet the above condition if the arrangement in question were the only arrangement under the pension scheme relating to the individual.

Crucially here, the second limb of this test is saying that you look at the member's arrangement in isolation - you do not need to consider any other arrangements that the member might have under the same scheme. 

Applying this to the case in question and looking at the DB arrangement in isolation, the member was a deferred member of the DB arrangement throughout the 2022/23 tax year and so meets the requirement in Section 234 (5BA). As such, they will indeed benefit from the deferred member carve out in respect of the DB arrangement provided, of course, that the value of their benefits across the Pension Input Period does not increase by more than the prescribed percentage. 

GMP Equalisation and Lifetime Allowance implications

Many schemes are now looking at GMP equalisation (GMPE) and one Aries member recently identified a member who retired in October 2022 and whose benefits will be increased as a result of the equalisation exercise.  The member’s equalised benefits will mean that they exceed their Lifetime Allowance (LTA).

The query concerned exactly how the LTA test is affected where benefits are retrospectively increased as a result of GMPE and whether or not this is impacted by the recent abolition of the LTA charge? (Oh, and I had been doing so well in not mentioning the Budget 2023!)

Here I was able to confirm that HMRC are quite clear on this point. The increase arising from a GMPE exercise ‘echoes back through time’ right back to the date of the original BCE 2and affects the amount originally crystallised. Where this results in a LTA charge (or an increased LTA charge) arising, the scheme will have to amend the Accounting for Tax Return for the tax quarter in which the original BCE occurred and pay the extra charge across to HMRC.

The abolition of the LTA charge from 6 April 2023 does not affect this position. Again, HMRC have been quite clear that, for any BCEs that occurred before 6 April 2023, all the previous rules apply, including those relating to the payment of LTA charges. 

Discretionary pension increases and Annual Allowance implications

My final query concerned a case where a scheme is proposing to provide a discretionary increase to all pensions in payment. The question was simply whether or not there could be any Annual Allowance implications arising from this?

For Annual Allowance purposes, one important aspect is the Pension Input Period (PIP). Under Sections 238 (7) and 238ZB (3) of the Finance Act 2004, a member’s last PIP under an arrangement is the one in which “the individual has become entitled to all the benefits which may be provided to the individual under the arrangement”.

In simple terms, once a member has become entitled to all of their benefits under an arrangement (which we assume to be the case for the pensioner members that are the subject of this query), then their last possible PIP for that arrangement was the one in which they became entitled to those benefits. As all PIPs are aligned with the tax year, the effect of this is that any pensioner who retired and took all of their benefits under the arrangement before 6 April 2023 cannot now have a PIP for that arrangement.

If there is no PIP for the arrangement, there can be no Pension Input Amount under that arrangement for Annual Allowance purposes, and so no Annual Allowance issues will arise. This point is addressed in the PTM here.

There are, however, two further points to bear in mind.

Firstly, if a member did become entitled to their benefits under the arrangement on or after 6 April 2023, they will still have an “open” PIP (which will end on 5 April 2024). If a BCE 3 occurs in respect of such a member before the end of this “open” PIP, then the BCE 3 would be reflected in the Pension Input Amount for this final PIP – see the PTM link above.

Secondly, there is an anti-abuse provision under Section 236A of the Finance Act 2004. This applies where, during a PIP a member enters into a “scheme” (meaning a “deal” or “agreement” etc) with the pension scheme / provider etc under which:

• the individual becomes entitled to an increase in the annual rate of their pension after they have become entitled to that pension, and
•  the main purpose, or one of the main purposes, of the “scheme” is to avoid or reduce any liability for an Annual Allowance charge. 

As this query concerns the pension scheme making a discretionary increase to the pensions in payment, it would not seem that this could possibly fall under this anti-abuse provision (as there was no previously agreed “scheme” with any of the members), however I mention it here just for completeness.

The above queries show that pension schemes and administrators are still having to deal with a wide range of complex issues whilst also planning for the changes on the horizon.

Aries Insight provides comprehensive and detailed guidance on the application of the deferred member carve-out and the Annual Allowance, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.  If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at dave@ariesinsight.co.uk or give me a call on 01536 763352.

Please note that we are not lawyers or financial advisers. The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.