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HMRC internal manual

Pensions Tax Manual

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Unauthorised payments: deemed or specific situations that are unauthorised payments: assignment of a member’s rights

Glossary PTM000001
   

Assignment
Liability for tax charges
Assignment of death benefits

Assignment

Section 172 Finance Act 2004

If a member of a registered pension scheme (or their personal representatives) assigns, or agrees to assign:

  • any benefit to which the member (or any dependant, nominee or successor of the member) has an actual or prospective right under the scheme, or
  • any right relating to sums or assets held under an arrangement in such a scheme

then an unauthorised member payment is deemed to have been made to that member (or to the member’s personal representatives in respect of the member).

If any other person, such as a dependant of the member following the death of that member, (or that person’s personal representatives) assigns, or agrees to assign:

  • any benefit to which that person has a prospective right under a registered pension scheme in respect of a member of the pension scheme, or
  • any right in respect of sums or assets held under an arrangement in such a scheme relating to a member of the scheme

then an unauthorised member payment is deemed to have been made to that person (or that person’s personal representatives) in respect of the member.

Meaning of ‘benefit’

References to a ‘benefit’ in both cases described above include the right to receive:

  • a scheme pension or dependants’ scheme pension either provided directly by the scheme administrator or purchased from an insurance company with sums or assets held for the purposes of the pension scheme, or
  • a lifetime annuity or a dependants’, nominees’ or successors’ annuity that has been purchased from an insurance company with sums of assets held for the purposes of the pension scheme.

Exceptions

Exceptions in relation to both cases described above are:

  • where the assignment is made due to a pension sharing order, or
  • where dealing with a pension guarantee under the scheme or contract following the member’s death.

See Assignment of death benefits for details about the assignment by the member of death benefits under a term assurance policy.

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Liability for tax charges

The member becomes liable to a tax charge (or charges) in respect of the deemed payment or, where the deemed payment occurs after the member’s death, the person (or the person’s personal representatives) becomes liable to the tax charge (or charges) instead.

The amount of unauthorised member payment which is treated as having been paid is the higher of:

  • the amount actually received for making, or agreeing to make, the assignment and
  • the amount that would have been received had the transaction been carried out at arm’s length and on the basis that any power to reduce the entitlement to the benefit or right being assigned did not exist.

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Assignment of death benefits

Where a member alters his or her arrangements in a registered pension scheme for determining who receives death benefits under a term assurance policy, such alteration could be an assignment. However, the circumstances under which that assignment is made could mean that it is not treated as an unauthorised payment.

The normal method of transferring a policy with death benefits would be by assignment. If there is a transfer of death benefits to a trust, therefore, the most probable analysis would be that this is by assignment. Such an assignment would not be regarded as an assignment of any right in respect of sums or assets held for the purpose of a registered pension scheme. However, it is still possible for the assignment to be treated as an unauthorised payment but only where there is an assignment by the member and the right to receive those benefits under the pension scheme is a prospective entitlement of a dependant or nominee or successor of the member (by definition death benefits cannot be an actual or prospective entitlement of the member, in respect of whose death the benefits are paid).

By way of illustration, here are a number of examples of genuine commercial transactions which would not be treated as unauthorised payments.

Death benefits go from being paid at discretion of scheme administrator to being paid at discretion of trustees

Discretionary beneficiaries have no rights to receive sums and assets, just a hope of receiving something if the trust is exercised in their favour. The beneficiary’s hope of receiving death benefits at the discretion of the scheme administrator is not therefore a ‘prospective entitlement’ to those rights. When assigned from a scheme in which the death benefits are paid at the scheme administrator’s discretion to a discretionary trust, such an assignment would not be regarded as an unauthorised payment.

By contrast, if death benefits under the policy are to go to a named beneficiary who is a dependant, nominee or successor, such beneficiary would seem to have a ‘prospective entitlement’ and an assignment which overrode those rights would be regarded as an unauthorised payment.

Death benefits go from being payable to the member’s estate to being paid at discretion of trustees

Individuals presumptively entitled to the member’s estate have no right of property in it. They may have a ‘mere expectancy’ but this does not amount to a ‘prospective entitlement’. While the transfer may be by way of assignment, what is assigned is less than a ‘prospective entitlement’ and such an assignment would not be regarded as an unauthorised payment.

Discretionary trust to which rights to death benefits are transferred includes a lender or the member’s company as a beneficiary

The same reasoning as above applies in relation to assignments to all discretionary trusts, whoever the potential beneficiaries under the trust are. Such assignments would not be regarded as unauthorised payments.

Assignment of rights to death benefits as security for a loan

Assuming the lender is not a dependant, nominee or successor of the member, whether or not there is a deemed unauthorised payment would be determined by whether the rights to death benefits were ‘prospective entitlements’ of a dependant, nominee or successor of the member when they were assigned - see above for further guidance on that issue.

A situation with the lender taking a charge over the death benefits instead would not be an assignment of the rights to those death benefits so would not be regarded as an unauthorised payment.