Taxman tackles asset-backed employer pension payments

Tax rules covering employer asset-backed contributions to final salary pension schemes are the latest to come under the taxman's scrutiny with a consultation launched this week.

Her Majesty's Revenue and Customs (HMRC) consultation relates to employers making regular payments into defined benefit (DB) schemes using an income stream which is secured against an asset.

For employers, the method can be more manageable than making one-off lump payments into staff retirement funds, and the pension scheme gains security with the right to the underlying assets if the payments stop.

But the government is concerned employers using this method can receive tax relief twice; once for the value of a future income stream, and again for each instalment.

Option A in HMRC's consultation would mean tax relief is provided only when cash is received by the scheme, removing automatic upfront relief for asset-backed contributions.

In option B, where asset-backed payments to pensions are recognised as liabilities in the accounts, tax relief would be given on the value of the asset. Where they are accounted for as equity, upfront relief would not be given.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "This could open the door to in-specie contributions for members."

Gavin Bullock, partner at Deloitte Pensions Advisory, said the firm expects in excess of £3bn of assets will be used in asset-backed funding structures this year.

"Assets as diverse as property and receivables have acted as collateral, and significantly improved the funding and security available to all pension scheme members," he said.

The HMRC consultation closes on 16 August.