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HMRC internal manual

Pensions Tax Manual

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Member benefits: pensions: pension payments authorised by regulations

 

Glossary PTM000001
   

 

Pension payments made in error
Pension payments continuing to be paid after death
Arrears of pension paid after death

Pension payments made in error

Regulations 13 and 14 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

These regulations can apply to payments of both a member’s pension as well as to payments of a beneficiary’s pension. They are intended to enable payments that are made in circumstances involving both error and good faith to stand undisturbed by the unauthorised payment charges that would otherwise apply. Typically these will be over-payments, though the regulation can extend to other errors of mis-payment.

The effect of these regulations is that the over-paid / mis-paid pension can be accepted as an authorised payment and be taxed as pension income in the tax year in which any instalment is actually paid over. An error-payment may be just a part of a pension instalment, or it may be the whole of it, or it may even be a number of such payments.

These regulations do not create a BCE in respect of the over-paid / mis-paid pension. Realisation of the error may require the scheme administrator to revisit their responsibilities as outlined in PTM164000. For example, the scheme administrator may need to issue a revised statement to the member that shows the amount of lifetime allowance used up by reference to the amount of pension to which the member was actually entitled where a statement had been issued by reference to the over-paid pension.

Regulation 13

This provides that if all or part of a pension payment is made in error (typically this will be an overpayment of pension), so much of the payment as was made in error, can be treated as an authorised member payment providing the following conditions are met:

  • the payment was genuinely intended to represent the payment of a pension permitted by the pension rules or the pension death benefit rules, as appropriate, and
  • the payer believed that the recipient was entitled to the payment, and
  • the payer believed that the recipient was entitled to the amount of the payment that was paid in error.

If however the error relates to the recipient having died, e.g. overpayment due to not having been aware of the death, this regulation does not apply - see Pension payments continuing to be paid after death below.

Regulation 14

If the discovery of the error (e.g. overpayment) occurred before the payment was made, the payment may still qualify as an authorised payment under this regulation. This provision starts with two possibilities:

  • The first is where the payment in error is actually a further pension payment made after payment(s) made under regulation 13. Those earlier payment(s) must have been of a similar nature to this one, been paid to the same recipient and been provided in similar circumstances (apart from the fact the error has now been discovered)
  • The second applies where there was no earlier payment error under regulation 13. It only applies to cases where the payment(s) would have been covered by regulation 13 if the error had not yet been discovered.

If a payment comes within one of the above two possibilities, then it must meet one or more of the following conditions to be an authorised payment. The conditions are that:

  • the payer took reasonable steps to prevent the error-payment being made, or being made in that amount, or
  • the payment is made while the scheme administrator is taking a reasonable amount of time to consider whether to change the rules of the scheme, so that such extra payments would in future be normal authorised payments under the tax rules, or
  • the payment is made while the scheme administrator is taking a reasonable amount of time to change the rules of the scheme, so that such extra payments will in future be normal authorised payments under the tax rules.

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Pension payments continuing to be paid after death

Regulation 15 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

Apart from the case of pensions continuing under a ‘term certain’ guarantee (PTM062400), pensions are supposed to stop on death of the pensioner. Regulation 15 is intended to enable certain payments of pension made in reasonable ignorance of a pensioner’s death, to stand undisturbed by the unauthorised payment charges that would otherwise apply. It can apply to payments of both a member’s pension, as well as to payments of a dependant’s pension.

The effect is that over-paid pension instalments which meet the conditions below, can be accepted as authorised member payments and be taxed as pension income of the recipient in the tax year in which they are actually paid over. This treatment may apply to one or more pension instalments, paid in any pattern or combination within the circumstances explained below. Instalments falling after the end of the time period below are not authorised by this regulation, but the fact that an unauthorised pension instalment might be paid after the end of the time period below, will not prevent earlier payments made within the acceptable circumstances from qualifying under this regulation.

In order to qualify as an authorised payment under this regulation, each such payment must:

  • be intended to represent a form of authorised pension (either member’s pension see PTM061100, or dependant’s pension - see PTM072000), and
  • be paid no later than 6 months after the pensioner’s death (instalments paid after this time will be unauthorised payments), and
  • be a payment which would have been an authorised payment had the recipient been alive on the date it was made, and
  • either:

    • the payer did not know of the death before the payment was made, and couldn’t reasonably have been expected to have known, or
    • where the payer did know of the death before the payment was made, the payer took all reasonable steps to prevent the payment either being made or being made in that amount.

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Arrears of pension paid after death

Regulation 16 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

Background

To understand the means by which pensions which do not start on time can still be authorised member payments (under the tax rules), it may be helpful to consider three scenarios:

  1. If delays in becoming entitled to scheme pension (PTM062300) occur while a member is still alive, the ‘Arrears of Pension’ Regulations 2006 - SI 2006/614 (PTM142000) specify when pre-entitlement arrears may be authorised. (Only scheme pensions are covered by this provision since other kinds of pension provision do not present the same difficulty).
  2. If a member dies during a delay in providing their pension, then two further possibilities can arise. The first of these can be illustrated with the following example: suppose such a member became actually entitled (according to the tax rules) to the payment of pension during their lifetime. And suppose they also became entitled to an arrear payment under SI 2006/614. In such an example, a back-payment of pension from the date of entitlement up to the time of their death is definitely due. Likewise, any arrear due under SI 2006/614 still has to be paid.

The first hurdle to authorising such a payment would seem to arise with pension rule 2 in section 165 Finance Act 2004: taken literally, this would appear to prevent any payment (other than certain guarantees PTM062400), being made after death. However HMRC interprets pension rule 2 in section 165 Finance Act 2004 to be referring to payment in the context of accrual of pension after death. According to this interpretation, the rule does not prevent payment of amounts already accrued during the member’s lifetime. And indeed, the tax rules allow any assessment to income tax, to look back to the years in which the pension actually accrued rather than the date it was paid. In practice most recipients are happy to not re-open earlier years and simply accept PAYE taxation at the time of payment.

Typically, the payment would be made to the estate of the deceased (i.e. to their legal personal representative) as an authorised member payment using the P45 procedure - effectively taxing the pension arrear as the member’s own income.

  1. The other possibility where a member dies during a delay in providing pension is that they die before fulfilling the formalities that are required to become entitled to the payment of that pension according to the tax rules. This does not mean that the scheme does not have some obligation to make some back-payments. However the tax rules put up the following hurdles to making the payment:
* no entitlement to pension will have accrued under the tax rules before death
* further accrual is not possible after death, since there is no authorised pre-death pension that could continue under a guarantee
* no fresh entitlement to pension can arise for the member once they have died, and
* the ‘Arrears of Pension’ Regulations (which hinge upon actual entitlement arising during the member’s lifetime), will not apply.

All of which mean that the payment looks set to be unauthorised. This is where regulation 16 of the ‘Authorised Payment’ Regulations SI 2009/1171 may help.

Regulation 16

This provides that an arrear of scheme pension paid to or in respect of the member, will be an authorised member payment so long as the following conditions are met:

  • the payment arises from a defined benefits arrangement
  • the member had died either after 5 April 2011 or both before 6 April 2011 and reaching age 75
  • the member was at ‘arm’s length’ from any sponsoring employer of:

    • the scheme paying the arrear, and
    • any other scheme that is both an occupational pension scheme and a registered pension scheme, which relates to the same employment as the paying scheme relates to (any ‘related scheme’), and
  • the payment represents accrued arrears of pension, and the scheme administrator had not established the member’s entitlement to the pension (arrear) until after the member’s death
  • the payment, had it been made immediately before the member’s death and had the member been entitled to it, would not have been an unauthorised payment, and
  • the scheme administrator could not reasonably have been expected to make the payment before the member’s death.

A member is said to be at ‘arm’s length’ from a sponsoring employer if that individual is as described at PTM063260.

How a person is ‘connected’ with another person is set out in section 993 of the Income Tax Act 2007. See PTM027000.

 

Limit on the member payment authorised by Regulation 16

Where the above conditions for Regulation 16 are met, it does not follow that all of the payment will be authorised. Only so much of the payment as represents arrears of pension accrued (without interest) during the period:

  • beginning with the earliest date from which the member could have required the scheme administrator to make the payment if the member had been entitled to it, and
  • ending with the member’s death

is treated as an authorised member payment by virtue of this regulation.

BCE 9

If the member has died before reaching age 75, so much of the payment as is authorised by regulation 16 will be a BCE 9 (see PTM088700 for further details including the effective timing of the BCE).