Pension Schemes – Additional categories of authorised lump sum payments

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Among the changes made to the tax rules for pension schemes from 6 April 2006 were provisions that allow only specified lump sum payments to be paid from pension schemes without incurring unauthorised payment charges and surcharges of up to 55%. There are a number of such authorised payments, the most common being the pension commencement lump sums, up to 25% of the pension fund, and the trivial commutation lump sums. The rules governing authorised payments are set out in Schedule 29 of the Finance Act 2004 and are taxed under the PAYE rules explained on pages 20 to 22 of booklet CWG2 Employer Further Guide to PAYE and NICs.

New Regulations have been made (the Registered Pension Schemes (Authorised Payments) Regulations 2009) that extend the list of authorised lump sum payments. There are a number of situations where certain pension and lump sum payments would be taxed as unauthorised payments but the Government believes it would be fairer to treat them as authorised payments, subject, as appropriate, to the tax rules for pension payments and authorised lump sum payments. They include:

• lump sums representing commutation of certain small pension pots
• certain payments made in error
• arrears of pension due after the death of the member.

All of the lump sum and pension payments defined in these Regulations are now liable for tax under PAYE instead of under the tax rules for unauthorised payments that operate outside of PAYE.

Some transitional measures are set out in the Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2009, modifying the Finance Act 2004 in order to accommodate the new Regulations.

The new Regulations and Order come into force on 1 June 2009 but the Regulations apply to payments made on or after

• 1 December 2009, in the case of commutation payments, and
• 6 April 2006, in the case of pension and lump sum errors.

The following notes describe the new types of authorised lump sum payments. HMRC will publish detailed guidance in due course in the Registered Pension Schemes Manual.

Commutation payments
Any payments in this category are treated as either

• a trivial commutation lump sum payment if paid to the pension scheme member, or
• a trivial commutation lump sum death benefit, if not paid to the member,

and taxed accordingly under PAYE procedures.

1. Payment made after a relevant accretion
In this context, “accretion” means a sum of money that has increased the value of a pension fund unexpectedly as the result of an “event”, namely

• a transfer of funds to another registered pension scheme or to a qualifying recognised overseas pension scheme, or
• the purchase of a scheme pension or annuity for the scheme member from an insurance company.

Any of the following accretions is a “relevant accretion” if it occurs after one of the above events:

1. a payment is received by the scheme in respect of the member other than a pension scheme contribution*
2. the pension fund has a value that exceeds the value that the scheme administrator believed it to have
3. the scheme administrator becomes aware that the member is entitled to a benefit, but only if the scheme administrator was not aware, and could not reasonably have been aware, of the entitlement before the event occurred.
   *Payments to the scheme by HMRC of rebates or minimum contributions are not “contributions” in this context.

A payment made after there has been a relevant accretion is treated as a trivial commutation lump sum payment if

1. there is no further entitlement to scheme benefits after the payment is made,
2. the payment does not exceed £2,000 and is not more than the value of the accretion, and
3. it is made on or before the relevant date, i.e.
   • 1 June 2010 if the accretion occurred before 1 December 2009, otherwise
   • six months after the date the accretion occurred.

2. Payment under the Financial Services Compensation Scheme
A payment made by way of compensation under the Financial Services Compensation Scheme is treated as a trivial commutation lump sum if

• the payment does not exceed £2,000, and
• there is no further entitlement to scheme benefits after the payment is made.

3. Payments made to members who had been untraceable
A payment made to, or in respect, a scheme member who is at least 75 years old is treated as a trivial commutation lump sum payment if

1. at the time the member reached the age of 75 the scheme administrator had taken reasonable steps to trace the member but had been unable to do so,
2. there had been no communication from the member for at least 5 years before the administrator
   • succeeded in tracing the member, or
   • learned about the member’s death
3. there are funds under a pension scheme available to the member but no payments have been made
4. the payment is made on or before the relevant date, i.e. the later of
   • 1 June 2010, and
   • 12 months after the date on which the scheme administrator traced the member or learned of the member’s death
5. the payment does not exceed £2,000, and
6. there is no further entitlement to scheme benefits after the payment is made.

4. Payments to members receiving annuities
A payment that would have been a trivial commutation lump sum if the scheme member were not continuing to receive payment of an annuity after the payment is made is treated as a trivial commutation lump sum payment if

1. the payment is made before the end of the commutation period, i.e. the period of a year following the day on which a trivial commutation lump sum was first made, or
2. where the member is not a member of any other registered pension scheme,
   • the member has not previously received either a trivial commutation lump sum or an authorised payment under this regulation, and
   • the member’s pension rights immediately before the payment does not exceed 1% of the lifetime allowance.

5. De minimis rules for pension schemes
A payment made by a public service pension scheme or an occupational pension scheme is treated as a trivial commutation lump sum payment if

1. the scheme member is at least age 60 but not yet 75
2. the member is not a controlling director of a sponsoring employer of the pension scheme, or connected with such a director
3. the payment does not exceed £2,000
4. the commutation value of the benefits to which the member is entitled under this and any related scheme does not exceed £2,000
5. there is no further entitlement to scheme benefits after the payment is made, and
6. no recognised transfer was made from the scheme or any related scheme within a period of 3 years before the date of the payment.

6. Payment made by larger pension schemes
A payment made by a public service pension scheme or an occupational pension scheme is treated as a trivial commutation lump sum payment if

1. there are at least 50 members
2. any of the following conditions is met
   • the scheme was in existence on 1st July 2008,
   • the payment is in respect of a defined benefits arrangement, and the aggregate amount of the sums and assets held for the purposes of the arrangement is more than half of the aggregate amount of all the sums and assets held for the purposes of this scheme, or
   • in respect of at least 20 members, the aggregate amount of the sums and assets held for the purpose of the arrangement exceed £2,000.
3. the scheme member is at least age 60 but not yet 75
4. the member is not a controlling director of a sponsoring employer of the pension scheme, or connected with such a director
5. the payment does not exceed £2,000
6. there is no further entitlement to scheme benefits after the payment is made
7. no excluded transfer was made into this scheme in relation to the member during the 5 years preceding the date of the payment, and
8. no recognised transfer was made out of this scheme in respect of the member during the 3 years preceding the date of the payment.

Pension errors
Any payments in this category are treated as a pension payment made under a registered pension scheme, in full unless otherwise stated, and taxed accordingly under PAYE procedures for pension payments.

7. Pensions paid in error
A payment made in error that was intended to be a permitted pension payment is treated as a pension payment if

1. the scheme administrator or insurance company believed the recipient was entitled to it and to the amount actually paid, and
2. the error is not that the member is no longer alive (in which case see 9. Pension continuing to be paid after death, below).

If the recipient was entitled to an authorised payment under other provision, only the amount of the payment that exceeds the authorised payment is treated as a pension payment.

8. Pension paid after discovery of error
A payment made after discovery of an error is treated as a pension payment if

1. either
   • it is paid after the error in 7. Pensions paid in error, above, is discovered, or
   • if it had not been discovered until after payment, it would have met the conditions in 7. Pensions paid in error, above
2. and
   • the payer took reasonable steps to prevent it being made, or being made in the amount actually paid, or
   • the scheme rules for the kind of payment in question were being considered for change, or were in the process of being changed, and the amount of time taken to reach a decision or make the change was not unreasonable.

If the recipient was entitled to an authorised payment under other provision, only the amount of the payment that exceeds the authorised payment is treated as a pension payment.

9. Pension continuing to be paid after death
A payment made in error that was intended to be a permitted pension payment is treated as a pension payment if

1. the recipient has died
2. the payment is made no later than six months after the date of the person’s death
3. the payment would not have been an unauthorised payment if it had been made on the day before the person died, and
4. either
   • the payer did not know, and could not reasonably have been expected to know, that the person had died., or
   • the payer knew that the person had died and took reasonable steps to prevent the payment being made, or being made in the amount actually paid.

10. Payments of arrears of pension after death
A payment of a pension to, or in respect of, a scheme member who has died is treated as a pension payment if

1. the payment is in respect of a defined benefits arrangement
2. the scheme member is not yet age 75
3. the member is not a controlling director of a sponsoring employer of the pension scheme, or connected with such a director, and
4. either
   • the payment represents accrued arrears of pension
   • the payment was allowed or required by the scheme rules as they stood immediately before the member died, and
   • the existence of the rule or rules concerned would not have prejudiced approval of the scheme by HMRC,

   or, where the member dies before 6 April 2006

   • the payment represents accrued arrears of pension, entitlement to which could not be established until after the member’s death
   • the payment would not have been an unauthorised payment if it had been made immediately before the member’s death and the member had been entitled to it, and
   • the scheme administrator could not reasonably have been expected to make the payment before the member’s death.

Only that part of the payment that does not exceed the amount accrued between

• the date that the member could have required payment if the member had been entitled to it, and
• the date of the member’s death,

is treated as a pension payment. Any excess is an unauthorised payment.

If the member died on or after 6 April 2006, payment of the amount that is a pension payment is treated as a benefit crystallisation event for the purposes of the lifetime allowance charge.

Lump sum errors
Any payments in this category are treated as a pension commencement lump sum under a registered pension scheme and taxed accordingly under PAYE procedures.

11. Commencement lump sums based on pension errors
A payment of a lump sum which is intended to be a pension commencement lump sum but which exceeds the permitted maximum because

• it is calculated by reference to the amount of a pension that includes a payment made in error (see 7. Pensions paid in error and 8. Pensions paid after discovery of error), or
• it is paid before the pension was calculated and, because of an error, the pension is not in fact paid, or paid in the amount originally intended, and it would have met the conditions in 7. Pensions paid in error if the error had not been discovered in advance,

is treated as a pension commencement lump sum.

If it is discovered that the lump sum exceeds the permitted maximum before the payment is made, that does not prevent these conditions being met if the payer took reasonable steps to prevent it being made, or being made in the amount actually paid.

Entitlement to the pension commencement lump sum that exceeds the permitted maximum is treated as a benefit crystallisation event for the purpose of the lifetime allowance charge and the amount for that purpose is the excess payment.

12. Commencement lump sums paid in error – money purchase arrangements
A payment of a lump sum which is intended to be a pension commencement lump sum but which exceeds the permitted maximum because

• it is calculated by reference to the annuity purchase price or the scheme pension purchase price, and an error in the calculation meant that the amount concerned is greater than it would have been, and
• the lump sum is paid before the lifetime annuity or scheme pension is purchased, and. because the error was discovered, the annuity or scheme pension is not in fact purchased,

is treated as a pension commencement lump sum.

If it is discovered that the lump sum exceeds the permitted maximum before the payment is made, that does not prevent these conditions being met if the payer took reasonable steps to prevent it being made, or being made in the amount actually paid.

Entitlement to the pension commencement lump sum that exceeds the permitted maximum is treated as a benefit crystallisation event for the purpose of the lifetime allowance charge and the amount for that purpose is the excess payment.

13. Commencement lump sums paid after death
A payment of a lump sum to or in respect of a member who has died is treated as a pension commencement lump sum if

1. the payment is in respect of a defined benefits arrangement
2. the member’s entitlement to the payment was not established until after the member’s death
3. the scheme administrator could not reasonably have been expected to make the payment before the member’ death
4. the payment would have been a pension commencement lump sum if it had been made immediately
5. the payment is made within one year, beginning with the earlier of
   • the day on which the scheme administrator first knew of the member’s death, and
   • the day on which the scheme administrator could first reasonably be expected to have known of it, and
6. the member was not a controlling director of a sponsoring employer of the pension scheme, or connected with such a director.

The payment of the lump sum is treated as a benefit crystallisation event for the purpose of the lifetime allowance charge and the amount for that purpose is the amount of the payment.

Further information:
Pensions – The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2009
The Registered Pension Schemes (Authorised Payments) Regulations 2009
Explanatory memorandum to The Registered Pension Schemes (Authorised Payments) Regulations 2009 and the Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2009
Impact Assessment of widening the scope of authorised payments that may be made by registered pension schemes

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This entry was posted on Monday, May 25th, 2009 at 05:00 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.