Changes to scheme specific tax free cash - May 2025 ?
benjaminfabi
Moderator
Hi,
Aegon has told us that HMRC implemented a rule change on 29 May that effectively stops the residual net fund from a scheme with SSPTFC being sent to a FAD arrangement.
We're not the only recipients of this information, as highlighted in this MSE forum post:
Does anyone know what rules are being referred to here? Is it S32 specific?
Benjamin Fabi
Comments
Threesixty had a heavily caveated note on this and linked it to https://gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062701#Bringing-a-drawdown-pension-into-payment
They said scheme managers used to rely on a permissive override (Finance Act 2004, Section 273B) to offer additional retirement options to clients but can no longer rely on this? Would have thought this would have been in the last Pension Scheme Newsletter though?
There has been no legislative change implemented.
HMRC updated their PTM guidance at that point to explain what needed to happen for a drawdown designation to have taken place.
HMRC suggested "blink of an eye drawdown" back in the early days of pension simplification to assist schemes fix some unintended consequences of pension simplification. Under the exact same rules then as there are now, which given the fact makes the update a bit strange..
The permissive override isn't correct really and a bit of a red herring. You don't need to use the permissive override if your scheme rules allow drawdown in the first place (schemes can have many different contracts in them and the contracts may dictate whether you get drawdown access or not).
It has come out of the blue and industry bodies and schemes are awaiting HMRC clarification. Some schemes may pause in the interim. Some may just carry on as normal.
Okay thanks both.
Does this mean that contracts that had used the permissive override (i.e. didn't implement a blink of the eye drawdown, or actual drawdown, in pre-a-day schemes are now going to be prevented from offering any retirement benefits that aren't an annuity for those with SSPTFC? (sorry for the wordy question!!)
That's what Aegon have told me.
If there is no drawdown option, then it either has to be the annuity, UFPLS, or a transfer which would result in SSPTFC being lost!
Doesn't UFPLS require either a rule change to the scheme or the use of the permissive override? And if they've implemented the former into the scheme to avoid using the latter, why wouldn't they have also implemented blink of an eye FAD at the same time, as they've been using that until now.
I've done a bit of digging and the UFPLS option actually results in SSPTFC being lost?
"Unlike flexi-access drawdown, anyone with scheme specific lump sum protection (allowing tax-free cash of more than 25% of the fund) cannot take an UFPLS from that scheme - unless they give up their right to the higher tax-free cash"
https://techzone.aberdeenadviser.com/public/pensions/Technical-Guide-Pensions-UFPLS
It's all a mess just now, as I guess it always is!
For those that are interested or not seen it, the differences in the PTM manual before and after:
Before: https://web.archive.org/web/20220531203553/https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062701#Bringing-a-drawdown-pension-into-payment
"Each pension scheme that offers drawdown will have its own processes for documenting how members designate benefits into drawdown pension.
Having designated funds into a drawdown pension fund, the member can then choose the amount and timing of the payment of their drawdown pension. They can choose to get regular payments or just draw funds when they want to. The member will need to agree this with their pension scheme which may have specific rules about how a drawdown pension can be paid."
Current: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062701#Bringing-a-drawdown-pension-into-payment
"In order for a designation to take effect, it is not sufficient for a member to just inform their scheme that that are designating their sums and assets. The scheme must be capable of making a payment of income withdrawal to that member, however a payment does not have to made from the designating scheme. If a member makes a request to designate their sums and assets where there is no possibility of income withdrawal to the member, an effective designation will not have taken place. A payment from the scheme does not have to be made, however it must be possible.
Provided that there is a possibility of income withdrawal for a member then it is up to each pension scheme that offers drawdown to have its own processes in place for documenting how members designate benefits into drawdown pension. For example, they might require all designated drawdown funds to be withdrawn in a single instalment.
Having designated funds into a drawdown pension fund, the member can then choose the amount and timing of the payment of their drawdown pension. They can choose to get regular payments or just draw funds when they want to. The member will need to agree this with their pension scheme which may have specific rules about how a drawdown pension can be paid."
Surely it would be a lot easier to apply a rule change to the scheme to allow UFPLS given the fact there would not be any further servicing requirement, rules and regs which come with running a FAD scheme? Hence why most schemes only allow full UFPLS and it allows them to extinguish their ongoing servicing requirements to the client if they choose this option.
Yes, I agree UFPLS is a far simpler mechanism. So here is my cynical take...
Previous guidance was loose in relation to how a member can designate into drawdown. In essence, a member could request that funds be designated and then, without needing to offer the actual mechanism to do it, a scheme administrator could create some background plumbing to get the designated funds into a scheme that could. Mostly, in my experience, this has been the blink of an eye method into an internal contract with FAD, although some have offered external transfers.
With LTA gone and now LSDBA, and shortly IHT/death charge to be implemented, this 'not quite proper' hack that's been used for years is allowing large pension funds to get around the new charge (especially when death occurs pre-75).
So I would say this exploit has been an 'open secret' that schemes have used, and now that there is a loss of LTA excess tax revenue, they've tightened it to stop big funds in old schemes bypassing the LSDBA.
If you have SSPTFC then this is painful when a scheme like the Aegon one is affected.
My expectation is that in these cases we're discussing the choice will be SSPTFC with an annuity, or transfer for standard benefits.
I didn't realise schemes were doing this on death to bypass the now LSDBA so that the beneficiary could gain access to a beneficiary drawdown contract where (on paper) they couldn't normally?
I can't see any other practical reason for tightening up the guidance? There has to be a monetary incentive for HMRC to do it, and stopping an exploit to bypass the LSDBA is my logical conclusion based on thoughts above.
It didn't matter if your scheme rules had drawdown written into them or you had to use permissive override to do it.
Has anyone heard from other providers on this matter since this original post?
Do we need to assume now that the drawdown to drawdown option is now dead in the water?
We have a client with a Standard Life EPP with a protected lump sum and today they said they will allow the balance of the fund, after taking cash, to be transferred elsewhere for drawdown. May change their minds on this of course!
Aegon have also now confirmed the same.
so have Aegon U-turned on their initial approach? Have they explained why they now feel they are in a position to be able to do it again given what has been discussed?
Based on what @les_cameron said initially in this thread, I assume clarity was sought and received, and now it's all back to as it was?
Clarity not received as yet (well not to my desk). I know there were discussion with some people -maybe was with those. I am awaiting the next pension scheme newsletter which I believe supposed to be the source of clarity.
Hi everyone - just interested to see if there has been any update or clarity on this as yet?
No update that I have seen as yet.