PSI20.1.5 - Funding and Surpluses: Funding General - Revenue Concern

(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)

[PN13.1 and 13.2]

These tax reliefs have a very substantial value and contribute significantly to encouraging provision for retirement. But as with all tax reliefs, controls are needed to prevent excessive relief being given. We indirectly control the tax reliefs connected with retirement benefits arrangements by limiting the benefits that can be given. But we must also be satisfied that the contributions on which tax relief is given and the funds which accumulate tax free, are reasonable in amount in relation to those benefits. The basic requirements of funding are that money should not be held except to provide benefits which the scheme has a commitment to pay (But see PSI20.6.10in relation to permissible unallocated or contingency funds) and that the amount of money held should not be more than sufficient to pay those benefits when they would normally become payable, ie in relation to retirement benefits at NRD. This means that it is not acceptable for an employer to fund in advance for the extra actuarial costs of a benefit which could come into payment before NRD. Any increase to early retirement benefits must be provided by way of augmentation at retirement. It is, however, acceptable for employees, where there is the intention to retire early, to fund the extra costs by payment of additional voluntary contributions (see PSI4.3.7). It is also acceptable for an employer to fund in advance for early retirements on grounds of incapacity on the basis of scheme experience of the numbers and ages of members retiring in these circumstances.