More ‘scheme pays’ problems (plus a bonus point)

In one of my recent articles, I looked at an issue with ‘scheme pays’ notice deadlines and the possibility of a member submitting an estimated ‘scheme pays’ notice.

In that article, I touched on the issues that might arise in practice where a member later changes the amount specified on the estimated ‘scheme pays’ notice, but said that that issue was outside the scope of the earlier article.

Perhaps predictably, last week heralded the arrival of a query where exactly this issue has arisen.

The facts of the case are that:

- in advance of the member’s retirement, their IFA estimated the amount of the member’s Annual Allowance charge;

- the scheme deducted the requested amount of charge from the member’s money purchase benefits;

- the scheme then put the member’s DB scheme pension into payment, with the member taking the remaining money purchase funds as a Pension Commencement Lump Sum – PCLS - (lower than the maximum permitted PCLS);

- the scheme has now been notified that the IFA overestimated the amount of the member’s Annual Allowance charge by ￡2,000, which the scheme will be reclaiming from HMRC.

The predictable question here is how can the scheme discharge its liability for this extra ￡2,000 without making an unauthorised payment?

Now, HMRC are not particularly helpful on this area: the PTM simply says that “HMRC will make the refund to the scheme for it to be dealt [with] in accordance with the scheme rules”.

There are, of course, a range of possible solutions here.

If the member is still within the PCLS payment window and the extra ￡2,000, when added to the PCLS already paid out would fall within the maximum permitted PCLS, then the scheme could simply pay out a further instalment of PCLS.?This would be a particularly convenient solution.

Alternatively, as the amount being returned arose from the member’s money purchase benefits the member may be able to take the extra funds as an Uncrystallised Funds Pension Lump Sum or designate them as available for flexi-access drawdown, noting that the fist option here would immediately trigger the Money Purchase Annual Allowance (MPAA) for the member, whilst the second would trigger the MPAA when any drawdown income is taken.

It would also be possible to use the extra amount to increase the DB pension in payment, although many schemes are looking to minimise their DB liabilities rather than increase them.

The member may be able to transfer the extra funds out to another provider, or use them to secure a lifetime annuity, although the amount involved is likely to be below most provider’s minimum transfer / annuity purchase price threshold.

Importantly, what the scheme cannot do here is pay the extra funds out to the member under the ‘relevant accretion’ provisions, unless the member’s scheme pension has been secured with an insurance company.

It is also highly unlikely that the ‘small pots’ commutation route would be available.?This is on the basis that the ‘value test’ here would have to include the value of the DB pension already in payment and, if the ‘small pot’ option had been available, it seems likely that this would have been used when the earlier benefits crystallised.

As almost always where an error has occurred, it is a case of finding a solution that works for both the scheme and the member.?At least in this case, the scheme is not actually to blame for the error occurring.?

Oh yes – onto that bonus point.

The Divorce, Dissolution and Separation Act 2020 (Commencement) Regulations 2022 [SI 2022 / 283] brought into force all of the remaining provisions of the Divorce, Dissolution and Separation Act 2020 with effect from 6 April 2022.?This is the Act that allows for ‘no fault divorces’ in England and Wales.

A number of Aries members have asked whether the Act has any impact on pension schemes and providers.

I have been able to confirm to these enquirers that the Act does not have any huge impact for pensions, however for petitions filed prior to 6 April 2022, the Court would initially make a ‘decree nisi’, which would then be followed by a ‘decree absolute’. For petitions filed on or after that date, the Court will instead make a ‘conditional order’ for divorce, which will be followed by a ‘final order’ for divorce.

This change in terminology arises, for example, under Paragraph 9 of the Schedule to the Act.

From the perspective of pension schemes and providers this is a relatively minor change, although it may be worth checking any standard letters etc for references to ‘decree nisi’ and ‘decree absolute’ and update them accordingly.?

Aries Insight?provides comprehensive and detailed guidance on the application of the ‘scheme pays’ requirements, 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 [email protected] 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.