Background

On 13 July 2026, HMRC issued “draft tax legislation”, together with a policy paper, aimed at allowing occupational defined benefit (“DB”) registered pension schemes to make one-off discretionary payments of scheme surplus to members as an authorised member payment.

In this response

We welcome the opportunity to provide feedback on the draft tax legislation, which will form part of the Finance Bill 2026/27. As pension lawyers our expertise lies, among other things, in understanding the legal requirements underpinning, and the complexities of, the current DB pensions landscape.

Alongside HMRC’s consultation, the DWP has consulted on the draft Occupational Pension Schemes (Payments to Employer) Regulations 2027 (“the draft DWP regulations”). We have responded separately to the DWP’s consultation, including sharing the general comments made below. Given the interaction between the two pieces of legislation, we have referred to the draft DWP regulations where relevant in our comments on the draft tax legislation.

We also responded to the DWP’s 2024 Options for defined benefit schemes consultation (the “2024 consultation”) and we have referenced this where relevant below.

General comments

As part of the 2024 consultation, the Government noted its plans “to simplify the process under which trustees can make one-off payments to members…rather than permanently uprate benefits thereby increasing scheme liabilities” (paragraph 27). Such payments would currently be unauthorised under pensions tax legislation and therefore subject to a penalty tax rate. The pensions industry welcomes this new option but we are worried it is too constrained in relation to deferred members and that may take away from its use.

The draft tax legislation sets out the conditions which will need to be met to enable a new authorised member surplus payment to be made, a key one being that it cannot be paid until the member has reached normal minimum pension age (“NMPA”), or potentially earlier if the “ill-health condition” is met. The intention is that members below NMPA can likewise be awarded an authorised member surplus payment, provided it is not actually paid until NMPA (or on earlier ill-health). As things stand, such lump sums will then need to be revalued up to NMPA, in accordance with regulation 17 of the draft DWP regulations.

The conditions for paying new authorised member surplus payments could give rise to a number of issues in practice, many of which could have a direct bearing on the draft DWP regulations, and to a certain extent on the draft tax legislation. In particular, baking in a promise to pay a future lump sum is likely to add to the administrative burden already faced by DB schemes. Some of the concerns expressed in our response to the DWP’s consultation are therefore broadly as follows:

  • as awards to members below NMPA will need to be postponed, trustees will need to ensure that there are sufficient funds available each time such a benefit falls due. Inevitably, this will have a knock-on effect on scheme funding, possibly requiring schemes to ring-fence relevant surplus funds
  • as with other accrued benefits, there is always a risk (however remote) that if scheme funding levels dip in the future such benefits may not be paid in full. This could create difficulties for scheme trustees
  • having to track new benefits until NMPA (or earlier ill-health), alongside existing scheme benefits, will inevitably create additional administrative burden and complexity. Schemes will need to understand the interaction between surplus awards and other benefits, and the correct treatment of such awards in different circumstances (including eg on divorce and in relation to cash equivalent transfers under DWP legislation, as well as recognised transfers under pensions tax legislation), and adapt systems accordingly
  • communicating surplus awards to members below NMPA might prove challenging. For example, will awards need to be included in benefit statements and on pensions dashboards etc?
  • finally, the draft tax legislation specifies the earliest point at which an authorised member surplus payment can be made (being “on or after the day on which the member reaches normal minimum pension age, or before that day if the ill-health condition was met immediately before the payment”). There is no upper age limit on paying a postponed authorised member surplus payment, and it makes sense for this to be decided by the trustees. In practice, it may be easier for trustees to make such a lump sum payable from the same age as the member’s pension, perhaps with an ability for the member to request it earlier. This would help avoid having to carry out separate communication exercises and payment processes with deferred members at NMPA and then again at scheme pension age.

Given the above, schemes considering sharing surplus with members may ultimately find it simpler to provide increases to existing benefits for anyone yet to reach NMPA, as permitted under the current legislative and regulatory framework. However, adopting a two-tier approach to surplus sharing could place the trustees at increased risk of member complaints (although the recent Pensions Ombudsman case of Mr E noted that, provided trustees considered relevant factors, they could pay pension rather than a lump sum out of surplus). As such, trustees are likely to stick with something tried and tested and pay additional pension.

Whilst it is clearly up to the Government to decide on the conditions to place on the payment of the new authorised member surplus payments, we are concerned that the current age constraints could limit their uptake in practice.

As an alternative means of providing a simple process under which trustees can make one-off payments to members, might an alternative option be to allow a payment to all members (irrespective of age) subject to a material monetary cap? Any surplus lump sum exceeding this amount could then be subject to attaining NMPA. It is already possible to pay a small lump sum of up to £10,000 regardless of age (known as a “relevant accretion”) where further benefits are identified in respect of an individual following the transfer out from a scheme. Similarly, a lump sum of up to £18,000 can be paid to a member at any age (which extinguishes their entitlement to benefits) where the scheme is winding-up.

Imposing a monetary cap on any payments made prior to NMPA would help reduce any potential for abuse and, of course, payment of the one-off surplus lump sum would be subject to tax at the individual’s marginal rate. Furthermore, it would also open the option up to being used (as intended) to release surplus back via members or employers into the wider UK economy to aid in growth.

Comments on the draft tax legislation

  • Draft section 168A(1)(b)(i): Requirement to reach NMPA or meet the ill-health condition

Our general comments above set out our concerns with the constraints in relation to deferred members. However, if the requirement to reach NMPA or meet the ill-health condition is retained in the final legislation, we think there will be practical issues with requiring the ill-health condition to be met “immediately before the payment”. Where a member is in ill health, the trustees may have already assessed whether the member meets the ill-health condition to determine whether an incapacity pension is payable. It would be helpful if the legislation could provide for any earlier determinations that an ill-health condition is met for the purposes of the Finance Act 2004 (“FA04”) to also apply to authorised member surplus payments.

  • Draft section 168A(2): Condition 1

Condition 1 is met if the decision to grant the right to receive the payment was at the discretion of the scheme trustees or managers. In practice, the power to augment member benefits (or other powers to provide additional benefits to members) may be at the employer’s discretion or subject to employer consent. Is the intention that a payment will be an authorised member surplus payment only if trustees have an absolute discretion to award it (subject to meeting the other conditions)? In our view, this could significantly restrict its use.

In keeping with the current legislation, the Pension Schemes Act 2026 (“PSA26”) will put trustees in the driving seat when it comes to making decisions about surplus payments to employers. However, scheme rules allowing member benefits to be augmented / additional benefits to be awarded will usually be standalone provisions. As a result, Condition 1 risks creating a “scheme rules lottery”, with the particular balance of powers under relevant provisions affecting whether schemes will be able to make use of authorised member surplus payments (or not).

  • Draft section 168A(3): Condition 2

Condition 2 requires sums or assets out of which the payment is made to be “held only for the purposes of a defined benefits arrangement relating to the member”. However, assets in a DB scheme or section are not generally held for a specific member arrangement, but rather in respect of the DB scheme or section as a whole. It may therefore be difficult to meet this condition, strictly speaking, in practice.

Condition 2 also appears to be out of step with the requirements referred to in Condition 5 (see our comments at paragraph 3.5 below). Might it be preferable for this condition to cross-refer to payments made in compliance with section 37 of the Pensions Act 1995 (“PA95”), as per the Registered Pension Schemes (Authorised Surplus Payments) Regulations 2006 (the “Authorised Surplus Regulations”)[1] which currently govern authorised employer surplus payments?

Finally, as part of our response to the draft DWP regulations we have noted that, whilst perhaps unusual, it is possible for a surplus to arise in an ongoing defined contribution scheme. This may become more common given the increasing use of commercial master trusts (eg through reserve funds building up from employer contributions, particularly those made by salary sacrifice). Where an employer ceases to participate, commercial master trusts may wish to make such reserve accounts more readily transferrable directly to the employer, especially where they have built up solely from employer contributions.

  • Draft section 168A(5): Condition 4

We are not clear what the policy rationale is for this restriction. It may be useful to have an ability to pay authorised member surplus payments on winding-up in addition to securing members’ scheme benefits, particularly as a surplus may not become apparent until after the benefits have been secured. Other types of authorised payments, such as a winding-up lump sum, may not always be available (for example, because a member’s benefits under the scheme exceed £18,000).

  • Section 168A(6): Condition 5

Condition 5 will be met “if the payment would have been an authorised employer surplus payment if the right to receive the payment had been granted to the sponsoring employer of the pension scheme”. This drafting requires trustees to hypothetically apply the requirements for authorised employer surplus payments to authorised member surplus payments. Not setting out clearly which specific conditions for authorised employer surplus payments need to be met makes it harder to understand whether Condition 5 as a whole is met.

A number of conditions apply to authorised employer surplus payments.  Under section 177 of the FA04, an authorised employer surplus payment[2] must be of a description prescribed by regulations. Under the Authorised Surplus Regulations, these requirements include that:

    • in the case of a DB scheme which is not winding up, the payment is made in compliance with the requirements contained in section 37 of PA95, which will be amended by the PSA26 and the draft DWP regulations (regulation 2(2) and Condition D of regulation 3(1)) of the Authorised Surplus Regulations)
    • in turn, the draft DWP regulations specify a number of conditions which must be met in order for a DB scheme in scope to comply with section 37 PA95. These include, for example, that trustees must obtain an actuarial assessment, consult the employer to agree a provisional amount of surplus to be paid, and comply with notification requirements including giving a notification to members at least three months before the proposed date of payment, and
    • the member must not be connected to the sponsoring employer at the date of the member’s death in relation to payments made “solely in respect of the death of a member” (regulation 2(4)(b) of the Authorised Surplus Regulations). (It is not clear how this might apply where an authorised member surplus payment is being made to a dependant after the member’s death. Would this mean that the dependant must not be connected to the member? This is unlikely to be the case for most dependants’ pensions and would rule out payments to spouses and children of the member.)

The requirements under the draft DWP regulations and the Authorised Surplus Regulations are specifically designed to apply to payments of surplus to an employer. As per the example given in paragraph 3.5.3 above, it is not always clear how all the conditions inherent in those requirements could be met in relation to authorised member surplus payments. If the intention is for all such conditions to apply equally here, some adaptations seem to us to be needed.

As another example, the requirement to make payment within five working days seems particularly problematic to satisfy where payments are being made to a large number of members. In addition, where an award has to be deferred for future payment because a member does not meet the NMPA requirement or ill-health condition, it is unclear how the requirement to make payment within five working days of the date of the actuarial certificate should be applied since the actual payment may be made much later. If this requirement is intended to apply to authorised member surplus payments, should it be that the decision to award the authorised member surplus payment is made within five working days of the date of the actuarial certificate?

As currently drafted, there would also seem to be cross-over and repetition between the various conditions (for example, the requirement for the payment to be at the discretion of the trustees or managers).

  • Treatment for the purposes of inheritance tax (“IHT”) if paid to a dependant after the member’s death

Where authorised member surplus payments are paid to a dependant following a member’s death (in accordance with draft section 168A(1)(b)(ii)), is the policy intent for these payments to be outside the scope of IHT? It would be helpful to make this explicit in the legislation so that the position is clear.

  • Other comments
    • The introductory wording for an authorised member surplus payment in section 168A(1)(a) is a point-in-time test to determine whether conditions 1 to 5 are met. However, the conditions to be met for an authorised member surplus payment are written in the past tense. Combining a point-in-time test with conditions in the past tense is confusing. For clarity, we suggest the conditions are redrafted in the present tense (using “is met if”, “are”, etc), in keeping with section 177 of the FA04 and the Authorised Surplus Regulations.
    • Section 168A(1)(c) of the draft tax legislation gives HMRC power to prescribe additional conditions in regulations. It would be helpful to know as soon as possible if HMRC intends to use this power to impose further conditions.
    • Authorised member surplus payments will not necessarily be paid at the same point that a member’s other scheme benefits come into payment. It would therefore be helpful if the draft tax legislation expressly confirmed that an authorised member surplus payment is not relevant for the purposes of the “retirement condition” for a protected pension age earlier than 55. That is, it would not form part of “all the benefits” to which the member must become entitled on the same date under paragraph 22(7)(a) of Schedule 36 to the FA04 in order to retain the protection.

[1] SI 2006/574

[2] The definition of such employer payments will be amended by the draft tax legislation to help distinguish them from authorised member surplus payments