Legislation will be introduced in the Finance Bill 2022-23 to clarify the tax treatment of payments made from a collective defined contribution (CDC) scheme that is in the process of being wound up, the government has announced.

The definition of CDC benefits is linked to the definition in the Pension Schemes Act 2021, which allows for a periodic income to be paid in place of a scheme pension when a CDC scheme is in the process of being wound up.

The Finance Act 2021 also treats that periodic income as a scheme pension for tax purposes, to prevent unauthorised payment tax charges from applying.

However, regulations made under the Pension Schemes Act 2021 mean that any payments being made from a CDC scheme during winding up are not ‘pension benefits’. This means periodic income is defined as not being a pension under those regulations, which made it an unauthorised payment for tax purposes.

Yet the government clarified that it "always intended" that payments made instead of a pension, from a collective money purchase pension scheme in the process of winding up, should be treated as authorised payments.

According to the government’s policy paper, Collective money purchase – winding up, the new legislation will therefore make it clear that an arrangement can be a CDC arrangement when it pays periodic income during the winding up period.

The government stated that it was also previously unclear whether funds may be designated into drawdown, which may be needed in the later stages of a CDC scheme winding up.

However, the new legislation will also enable a CDC scheme to designate the funds used to pay periodic income during winding up into drawdown.

Finally, the legislation will ensure that the quantification process required by DWP legislation does not have unintended tax consequences for dependant member benefit recipients, which was a risk under the current system.

The changes will apply from the date of Royal Assent to the Spring Finance Bill 2023.

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