PSI5.5.11 - Contributions by Employers: Cessation of Trading - Large Contributions Paid to an Existing Scheme when Trading Ceases

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

Many of these schemes will be "proceeds of policy" cases (see PSI13.3.9) and because of "preservation" a member who leaves service before NRD is entitled to whatever benefits the proceeds of the policy can buy. If a large special contribution is paid to such a scheme when trading ceases ask the agents additionally for details of:

1. the member's salary (including fluctuating emoluments) for the last 3 years,
2. the member's age and length of service with the employer (if not already known),
3. an estimate of the benefits that can be provided from the policy proceeds at the member's NRD if no further contributions are paid.

The contribution paid should not be more than is necessary to fund benefits for service completed to the date trading ceased based on estimated final remuneration at NRD. On receipt of the reply check that the scheme is not over-funded. This can be done by calculating the member's maximum approvable benefits as though he or she had left service at the date trading ceased even though this restriction will not be in the scheme rules (the formula is here being used only as a notional test of the scheme's funding and is not directly restricting the benefits payable). If, having made this calculation, you are satisfied that the benefits are not excessive, no problems arise and the contribution can be allowed. But where the contribution could result in excessive benefits for the member and the member's dependants tell the practitioner that the contribution is not acceptable. Ask for it to be reduced to an acceptable level; failure to do so could prejudice approval of the scheme (see Part 19).

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