Regulations have been made which add to the list of authorised payments which can be made from registered pension schemes.
Payments made in error
Overpayments or payments made in error are currently treated as unauthorised payments unless they are recouped in full (payments of up to £250 are in practice ignored by HMRC). The unauthorised payment will give rise to a tax charge both on the member and the scheme. The new provisions, backdated for payments made since 6 April 2006, mean that payments made in error will be authorised where:
- the payment was made in the belief that the recipient was entitled to a payment of that amount - this can in certain circumstances include payments made after the discovery of the error and includes the overpayment of connected lump sums
- pensions continue to be paid for up to six months after the death of a pensioner where the person paying could not reasonably have known about the death or took reasonable steps to prevent the payment
- the payment is of arrears of pension or lump sum from a DB scheme paid after the pensioner's death subject to certain conditions
- there is overpayment of a lump sum from a money purchase arrangement which exceeds the permitted maximum because of an error in the calculation of the annuity or scheme pension purchase price.
Currently any trivial commutation must take account of all of an individual's pension arrangements. This makes it very difficult in practice for trustees to commute very small pensions. There is no change to the current position in relation to personal pension schemes but, from 1 December 2009, trustees of occupational schemes may make trivial commutation payments of up to £2,000 where: • the member is aged between 60 and 75
- the member is not a controlling director of a sponsoring employer, nor connected to someone who is
- the payment extinguishes the member's entitlement to benefits under the scheme; and
- no transfer payment had been made out of the scheme, or a related scheme, in respect of the member in the last 3 years.
- Further conditions apply according to whether or not the scheme has at least 50 members:
- where the scheme has fewer than 50 members, the aggregate value of a member's benefits in this or any related scheme must not exceed £2,000
- where the scheme has 50 members or more, no excluded transfer must have been made within the last five years and one of the following conditions must be satisfied:
- the scheme was in existence on 1st July 2008, or
- the payment is in respect of a DB arrangement the assets of which represent less than half the aggregate amount of assets held for the purposes of all the employer's DB arrangements, or
- in respect of at least 20 members the aggregate amount of assets held for the purpose of the arrangement exceed £2,000.
Stranded pots and other payments
From 1 December 2009, where residual assets or benefits remain in a scheme after a member has transferred out or drawn his main benefits, a payment of up to £2,000 may be made as long as it extinguishes the member's entitlements under the scheme and is made within 6 months of the date the funds were received (or 1 June 2010 for existing funds). This provision is intended to assist where there has been a belated contribution or transfer payment or the value of the member's rights is discovered to be greater than was originally thought.
The Regulations will also allow:
- payments of up to £2,000 to or in respect of a member aged over 75 where, at the time the member reached 75, the administrator had been unable to trace him
- payment of up to £2,000 from the Financial Services Compensation Scheme
- trivial commutation payments for those in receipt of a lifetime annuity.
HMRC are due to issue guidance on these new provisions as an update to the Registered Pension Schemes Manual.