Policy paper

Collective money purchase – winding up

Published 15 March 2023

Who is likely to be affected

Individuals who are members (or dependants of members) of a collective money purchase pension scheme that is in the process of being wound up.

Employers using a collective money purchase pension scheme that is in the process of being wound up.

Pension scheme administrators of an employer-sponsored collective money purchase pension scheme that is in the process of being wound up.

General description of the measure

This measure will make it clear in tax legislation the treatment of payments made from a collective money purchase pension scheme that is in the process of being wound up.

Policy objective

The government’s policy intention has always been that payments made from a collective money purchase pension scheme in wind-up should be treated as authorised payments.

Background to the measure

The Pension Schemes Act 2021 introduced legislation to allow collective money purchase pension schemes to operate in the UK. The Finance Act 2021 introduced the tax legislation to allow this new type of pension scheme to operate as a UK registered pension scheme, without the tax consequences that arise when a pension scheme is not registered.

The government always intended that payments made instead of a pension, from a collective money purchase pension scheme in the process of winding up, should be treated as authorised payments. The quantification of a dependant scheme pension should also not cause unintended tax consequences, however, further engagement with the industry have identified instances where the legislation may not currently achieve this.

This measure clarifies the tax legislation to ensure that authorised payments may be made from a collective money purchase pension scheme that is in the process of winding up. It also clarifies the tax treatment of dependant scheme pensions during the winding up process.

Detailed proposal

Operative date

The measure will apply from the date of Royal Assent to the Spring Finance Bill 2023.

Current law

The current pensions tax rules for registered pension schemes came into force on 6 April 2006 (A-day) and are set out in Part 4 of the Finance Act 2004.

There are no restrictions on what payments a registered pension scheme can make, but the Finance Act 2004 sets out the tax consequences of any payment.

The definition of collective money purchase benefits is linked to the definition in the Pension Schemes Act 2021. That provides for a periodic income to be paid in place of a scheme pension when a collective money purchase pension scheme is in the process of being wound up. The Finance Act 2021 treats that periodic income as a scheme pension for tax purposes, to prevent unauthorised payment tax charges from applying.

Regulations made under the Pension Schemes Act 2021 provide that any payments being made from a collective money purchase pension scheme during winding up are not pension benefits. This means periodic income is defined as not being a pension under those regulations, which makes it an unauthorised payment for tax purposes.

This also means that it is unclear whether funds may be designated into drawdown, which may be needed in the later stages of a collective money purchase pension scheme winding up. This designation requires the funds to be available to pay a drawdown pension and if a pension cannot be paid then the funds would not meet the requirements to be designated into a drawdown fund.

During the winding up process, a Collective Money Purchase (CMP) scheme is required to quantify for each beneficiary the amount that represents the value of their accrued rights under the scheme. This effectively creates individual “pots” that need to be discharged to each beneficiary in respect of those rights (section 36(1) PSA21).

Paragraphs 2(9) and 2(10) of Schedule 28 Finance Act 2004 treat the income paid from those pots as a scheme pension, death benefit rule 2 in section 167 confirms that a dependants scheme pension can be paid in respect of a CMP arrangement and paragraph 16 of Schedule 28 defines what a dependant scheme pension is. If the member dies over the age of 75 within 12 months of the initial quantification, paragraphs 16A to 16C of Schedule 28 checks that the dependants’ scheme pension (which has not tested against the member’s lifetime allowance) is not overvalued in relation to the member’s scheme pension (which has been tested against the member’s lifetime allowance).

It is highly likely that quantifying the pension in line with pensions legislation (paragraph 7(7) of Schedule 6 SI 2022/255 and SR 2022/191) will exceed the limit imposed in paragraph 16B(1) of Schedule 28 which would currently lead to unauthorised payments charges.

Proposed revisions

Legislation will be introduced in Finance Bill 2022-23 to make it clear that an arrangement can be a collective money purchase arrangement when it pays periodic income during the winding up period.

Legislation will enable a collective money purchase pension scheme to designate the funds used to pay periodic income during winding up, into drawdown.

Finally, the legislation will ensure that the quantification process required by DWP legislation does not have unintended tax consequences for dependant member benefit recipients.

These will be introduced in Spring Finance Bill 2023.

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2022 to 2023	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
—	nil	nil	nil	nil	nil

This measure is not expected to have an Exchequer impact.

Economic impact

This measure is not expected to have significant economic impacts.

Impact on individuals, households and families

This measure is not expected to have any other impact on individuals. This is because this measure clarifies the policy intent for the tax treatment of payments made by collective money purchase pension schemes that are in the process of winding up.

Collective money purchase pension schemes will be able to operate as UK registered pension schemes so there are no additional impacts on the individual. The individual will continue to be in a position to receive authorised payments, even when the collective money purchase pension scheme is in the process of winding up.

There is expected to be no impact on family formation, stability or breakdown.

Customer experience is expected to stay broadly the same because enabling the individual to continue to be in a position to receive authorised payments when the collective money purchase pension scheme is winding up will not change when and how the individual will need to interact with HMRC.

Individuals will have either moved to this new UK registered pension scheme from an existing registered pension scheme, or they will have been new to pension savings. This measure will ensure they can continue to receive the benefit of authorised payments if the scheme is in the process of winding up.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on pension scheme administrators and employers who use a collective money purchase pension scheme. One-off costs could include familiarisation with this change. There are not expected to be any continuing costs.

This measure is not expected to impact on civil society organisations.

Customer experience is expected to stay broadly the same because enabling collective money purchase pension schemes to make authorised payments when in the process of winding up will not change how the pension scheme administrator or employer will need to interact with HMRC.

Operational impact (£m) (HMRC or other)

HMRC will not need to make any additional changes to its IT systems to support the implementation of this measure. Any other operational impacts will be delivered as part of business as usual activity.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communications with pension scheme administrators and employers who decide to operate collective money purchase pension schemes.

Further advice

If you have any questions about pension schemes, please contact the Pensions Policy team in HMRC at pensions.policy@hmrc.gov.uk.