Pensions tax: bridging pensions
Background
Legislation to be introduced in the Finance Bill 2016 is set to include consequential changes to ensure that, following the introduction of the new single tier State Pension from 6 April 2016, the tax rules on bridging pensions continue to be aligned with DWP legislation, in particular the Pensions Act 2014, with a view to allowing the payment of bridging pensions to continue as at present.
HMRC is consulting on the draft legislation and is expected to consult on the drafting of related regulations in due course.
In this response
General comments
We support the Government’s policy intent of maintaining the status quo for existing bridging pension arrangements. We consider that schemes should not have to face additional liabilities as a result of changes to the State Pension and resulting changes to contracting-out legislation.
We have some comments on the draft proposal, which we set out below. However, it is difficult to assess the full picture without access to the draft regulations – we understand that these may not be available before 6 April 2016.
Current law
The policy paper which accompanies the draft Finance Bill 2016 clauses sets out HMRC’s interpretation of the way in which the pension rules operate in relation to bridging pensions. This states that “Paragraph (2)(4)(c) allows the pension to reduce not earlier than when the member reaches state pension age, by an amount that does not exceed the relevant state pension rate. This allows the scheme to pay a higher scheme pension at the outset and reduce it when the member starts to receive the state pension”.
In practice, there is a wide range of ways in which a reduction for bridging the gap for those retiring before State Pension Age between is applied. For example, there may be direct references to the existing Basic State Pension (BSP) or Lower Earnings Limit, or elements of the BSP, such as the “Category A retirement pension”. In addition, such references may be more or less broadly defined. Alternatively, there may be specific actuarial formulae written into scheme rules.
Note: In version of the response submitted to HMRC, we included examples of current (anonymised) bridging pension rules. We submitted these for HMRC’s purposes in connection with the drafting of the Bill and regulations and requested that they are not made publicly available. For this reason, we have not included the appendix here.
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