On 25 July 2008 HMRC announced draft regs were to be published concerning reductions of scheme pensions already in payment on winding-up, to prevent inadvertent tax consequences.

One of the conditions of a scheme pension is that it should be payable for life and should not be reduced once the member has become entitled to its actual payment, apart from in certain defined circumstances. One of these circumstances is where all of the scheme pensions being paid are reduced at the same rate. Where a scheme is winding-up, not all of the pensions being paid to members may reduce. This means that some individuals may find that not only has their scheme pension been reduced, because there are insufficient funds to maintain the existing level of pension, but that this reduction renders the future pension as unauthorised payments.

HMRC yesterday published the draft amendments to The Pension Schemes (Reduction in Pension Rates) Regulations 2006 (SI 2006/138)

The exempted circumstances are that the scheme is an occupational pension scheme, it is being wound up, there are insufficient sums and assets to continue to pay the pension at its present rate, and when winding-up commenced there were at least 20 members. Avoidance arrangements designed to increase a member's entitlement to a tax-free lump sum are specifically excluded.

These regulations will apply to any such reductions made in these circumstances since 6 April 2006.