Pensions Bulletin 2026/23

Major developments for the new surplus regime

As we go to press the DWP has published a consultation document and draft regulations covering new surplus flexibilities for defined benefit pension schemes. These principally concern the conditions which must be met for trustees of DB pension schemes to make a surplus payment to the sponsoring employer, with the measures expected to come into force in April 2027.  

The Pensions Regulator has also published a statement that provides early views on the principles that trustees should consider when releasing surplus and some high-level illustrative case studies. 

We will cover these in detail in a News Alert to follow. 

VAT on DB pension schemes – HMRC guidance updated 

We may have reached a conclusion to the long running saga of how DB pension scheme costs are treated for VAT purposes. 

Last year (see Pensions Bulletin 2025/25) HMRC announced that from 18 June 2025 employers can claim back all the VAT on pension scheme investment costs, the old “dual use” requirement for deductibility being dropped. HMRC promised guidance which has now arrived in the form of updates to the VAT manual, with much of the old guidance having been archived. 

This guidance relates to all funded occupational pension schemes but is of most relevance to DB schemes.  

For employers, the updated guidance states that input tax incurred by an employer on services provided in relation to its funded occupational pension scheme will be the employer’s input tax. It is treated as an overhead of the employer’s business as a whole and is recoverable in full, subject to normal partial exemption restrictions. This applies to investment costs and administration costs equally.  

The guidance goes into some detail about the evidence needed for recovery; invoicing and contractual arrangements for employers, trustees and fund managers. Broadly, there are two routes for an employer to evidence that they paid the costs of running a scheme: invoices directly issued to the employer (whether paid by the employer or the trustee) or the trustee incurred the costs and raised a taxable charge to the employer. This may mean an extra step in the process for some employers who had previously been adopting a different method. 

On the trustee side, HMRC explains that, if a trustee is VAT registered, a trustee can treat as its input tax VAT incurred on services connected with the continuing management of the scheme (subject to normal rules). Where trustees make a taxable onward supply to the employer, input tax incurred by the trustee will be deductible. This also applies to legal and actuarial services, even where these are specific to the trustee or where the trustee’s interests potentially conflict with those of the employer. 

Transfers – anti-fraud regulations to be amended  

The DWP is consulting on amendments to the anti-fraud transfer regulations (the 2021 Regulations). These restricted members’ statutory entitlement to a transfer unless a set of conditions, including amber and red flags, were met. These regulations have been in force since 2021 (see our News Alert from the time) and have been criticised variously as ineffective and/or creating unnecessary friction for legitimate transfers. The Government is now proposing amendments to the 2021 Regulations to improve them. 

The draft amendments are as follows: 

• A new red flag where a transfer is proposed and the evidence during trustee due diligence does not demonstrate an employment link between the member and the receiving scheme - this was previously an amber flag (which is not a complete bar to a statutory right to transfer).  

While the consultation document states that this measure is aimed at small self-administered schemes, which have been identified as particularly vulnerable to fraudsters, it applies to all occupational pension schemes. 

• For the First Condition to be met (which allows more straightforward transfers to proceed without needing to go through the more involved red and amber flag checks) trustees must currently be satisfied beyond reasonable doubt that that the transfer is to a specified type of receiving scheme. This will be broadened so that it may be met by the trustees satisfying themselves, on the balance of probabilities, that the transfer is to a “reputable” pension scheme. 
• Where an amber flag requires Money and Pension Service (MaPS) scams guidance, DWP proposes that a member should not have to repeat MaPS guidance if they can evidence they have taken it within the previous 12 months. 
• The overseas investment amber flag is to be removed altogether. 

Consultation closes on 21 July 2026.

Bulk transfers into CDC schemes made easier  

The DWP has confirmed it will go ahead with its proposals to remove the “appropriate adviser” requirement when trustees transfer money purchase benefits without guarantees to collective defined contribution (CDC) schemes using the existing bulk transfer mechanism. This is in response to part of its consultation on CDC schemes last October (see Pensions Bulletin 2025/43). 

The approach now adopted for bulk transfers into CDC schemes is the same as that already available for bulk transfers into Master Trusts, and in particular, written advice from an independent qualified adviser is no longer required by legislation (although the response makes clear that trustees are not prohibited from taking advice if they consider it appropriate to carry out their fiduciary duty). The DWP considers that CDC schemes, as is the case for Master Trusts, are subject to a rigorous authorisation and supervision regime, and have to satisfy minimum criteria covering, amongst other things, governance and administration.  

The DWP has also published draft amending regulations and updated non-statutory guidance at the same time, both making minimal changes to existing material to enable such bulk transfers to take place. 

HMRC consults on draft regulations addressing tax pitfalls arising from GMP conversion 

HMRC has launched a consultation on draft regulations intended to protect pension scheme members from facing unexpected Annual Allowance tax charges when schemes equalise guaranteed minimum pensions (GMPs) using the statutory GMP conversion method. 

As the legislation currently stands, GMP conversion can cause deferred members to lose their deferred member carve-out (DMCO) protection from the Annual Allowance and generate unintuitive and disproportionate Annual Allowance usage (see News Alert 2022/02). GMP conversion can also result in adverse Annual Allowance consequences for members without the DMCO - for example active members, or where conversion occurs immediately after an active member leaves service or in the year of retirement. 

These regulations have been long awaited, and the hope was that where a GMP conversion exercise is carried out, any increase in pension rights attributable to the conversion or to the rectification of sex-based inequalities linked to GMPs would be disregarded when calculating pension input amounts for Annual Allowance purposes, unless the rights were conferred as part of an arrangement which had tax avoidance as one of its main purposes.  

However, as drafted the regulations only appear to cover removing the GMP rules from a pension scheme. Related benefit changes the trustees consider necessary or desirable as a consequence of, or to facilitate, the GMP conversion, for example to avoid significant reductions in the pensions payable to members at retirement, do not appear to be covered. The regulations also only appear to apply to deferred members who already benefit from a DMCO.  

The regulations are expected to have effect from the 2027/28 tax year onward; consultation closes on 13 July 2026. 

PDP to press ahead with private sector Dashboards working group