TT31: Pre-March 1987 Pensions

March 26, 2003

In Issue 7 of Topical Tips we highlighted the incredible tax planning opportunities offered by pre-March 1987 pension schemes where beneficiaries can draw the whole of the funds of the scheme as tax-free cash. However, we also sounded a note of caution as the Inland Revenue had been attempting to tax this cash if it was paid to someone ostensibly taking early retirement, but who in fact did not then cease all work for the company.

A recent Court decision has clarified the law in this area. Unfortunately, the decision handed down by the Court of Appeal has confirmed the validity of the Inland Revenue’s approach. The case in question is Venables and others v Hornby (Inspector of Taxes).

The simple facts are that Mr Venables was an executive director, chairman and major shareholder in his family company. In June 1994 (aged 53) he retired as an executive director but continued as an unpaid non-executive director of the company.

His normal retirement age under the terms of the company’s pension scheme was 60. Shortly after his retirement the pension scheme trustees, under discretion that they had, paid Mr Venables £580,591 as his tax-free cash entitlement. In view of the early retirement combined with the continuing involvement of Mr Venables as a director of the company (albeit in an unpaid, non-executive capacity), the Inland Revenue assessed the payment for income tax. The subsequent appeal has been decided in favour of the Inland Revenue.

Better safe than sorry
It is not yet clear whether there will be a further appeal to the House of Lords. What is certain, however, is that anyone considering taking pension benefits as tax-free cash must make absolutely certain that they either cease all activity with the company at that time or only take benefits at normal retirement age (the very cautious might do both!).

Barnes Roffe Topical Tips

  • It continues to be vital that all individuals with pre-March 1987 pension schemes (as defined) take action so that their tax-free cash can be maximised.
  • People considering early retirement must take specialist advice – not only can retiring early cause the tax-free cash to be less than might otherwise be the case, it can cause the cash to lose its tax-free status.
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