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Don’t block scheme pension route

Further to the article in the August 3 edition of Money Marketing, headlined, Standard complains over loophole that it revealed, scheme pensions could in the future form a very valuable option for self-invested trust-based money-purchase arrangements.

Historically, scheme pensions have been paid from defined-benefit schemes, where the scheme trustees take on the onus of payment of the pension rather than buying out the liability via the purchase of a formal pension annuity. As we read the legislation, there is no reason why scheme pensions should not be paid from trust-based money-purchase arrangements in the future.

Some commentators, notably Standard Life, have argued that this is a loophole in the regulations which Revenue & Customs should try to plug. We do not believe this is a fair analysis.

Take the facts. Under a scheme pension, the individual has to receive a known level of pension entitlement. This would, of course, be subject to tax on payment. If one looks at alternative forms of drawing pension benefits under the post-A-Day rules for income drawdown, an individual is not required to take any income at all from his drawdown fund.

From the point of view of HMRC, therefore, the scheme pension provision must be rather more attractive as it ensures collection of tax which might otherwise be deferred until some point in the future.

The second aspect of scheme pensions relates to the mortality profit on death. Again, in the defined-benefit scheme environment, the reason why the scheme takes on the responsibility for payment of pension is that, on death, the mortality profit is retained by the scheme rather than being retained by an insurance company through its annuity fund.

I find it hard to see why HMRC would be concerned about similar provisions arising in a trust-based money-purchase environment, where the mortality profit is retained so that it can be utilised to boost pensions for other scheme members.

This provides added flexibility and surely the role of HMRC is not to require that formal annuities should be purchased with insurance companies, thereby boosting insurance company profits.

Overall, therefore, we believe that the scheme pension route is something which is a valuable addition to the range of options available to members of trust-based money-purchase arrangements so that they can enjoy the same flexibility already available to defined-benefit occupational schemes.

Clearly, this option is rather better than tax-neutral for HMRC compared with some of the retirement options already available.

Mike Fosberry
National head of pensions
Smith & Williamson


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