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HMRC internal manual

Pensions Tax Manual

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Unauthorised payments: deemed or specific situations that are unauthorised payments: surrender of rights or benefits

Glossary PTM000001
   

Surrender of rights or benefits
Liability to tax charges
Exceptions
Retirement-benefit activities compliance exercise

NOTE: This guidance refers to surrenders occurring from 10 October 2007. Between 6 April 2006 and 10 October 2007 there were different rules for members and for other people. See National Archives version of page RPSM09100172 (external users please use [http://webarchive.nationalarchives.gov.uk//http://hmrc.gov.uk/manuals/r…](http://webarchive.nationalarchives.gov.uk//http://hmrc.gov.uk/manuals/rpsmmanual/RPSM00100000.htm)) for the guidance relating to surrenders between these dates.

Surrender of rights or benefits

Section 172A Finance Act 2004

If a member of a registered pension scheme surrenders, or agrees to surrender:

  • any benefit, other than an excluded pension, to which the member (or any dependant, nominee or successor of the member) has a prospective right under the scheme,
  • any rights to receive payments under a lifetime annuity or a dependants’, nominees’ or successors’ annuity purchased from an insurance company with sums or assets held for the purposes of the pension 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.

Also, if any other person who is not a member of the registered pension scheme, such as a dependant of the member surrenders, or agrees to surrender:

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

then an unauthorised member payment is deemed to have been made to that person in respect of the member.

Meaning of ‘benefit’

References to a ‘benefit’ in the 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.

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Liability to 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 becomes liable to the tax charge (or charges) instead.

PTM134100 onwards has details of the tax charges in respect of unauthorised member payments.

The amount of unauthorised member payment which is treated as having been paid is the amount that would have been received had the surrendered benefit instead been assigned in a transaction carried out at arm’s length and on the basis that any power to reduce the entitlement to the benefit or right did not exist.

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Exceptions

A pension is an excluded pension for the purposes of the surrender provisions to the extent that it is a guarantee payment complying with the requirements of pension rule 2 - these are described at PTM062400 for annuities and PTM062310 for scheme pensions.

As well as the excluded pensions, there are further exceptions, which are where:

  • the surrender is made due to a pension sharing order
  • the surrender is made by the member to provide an entitlement to benefits for a dependant, or nominee, of the member, where those benefits are payable after the death of the member - note from 20 March 2014 onwards this exception applies only if the entitlement to benefits for a dependant, or nominee, is held (or is to be held) by the dependant, or nominee, under an arrangement under the pension scheme relating to the member or dependant or nominee
  • the surrender is made by a dependant, nominee or successor of the member (‘the beneficiary’) to provide an entitlement to benefits for a successor of the member, where those benefits are payable after the beneficiary’s death - note this exception applies only if the entitlement to benefits for the successor is held (or is to be held) by the successor under an arrangement under the pension scheme relating to the beneficiary or successor
  • there is a transfer, or agreement to transfer, benefits or rights so as to become benefits or rights held under another arrangement under the pension scheme relating to the member or dependant of the member
  • a lifetime annuity or a dependants’ or nominees’ annuity ceases to be payable by an insurance company and as a result the insurance company transfers sums and assets to another insurance company, which applies those sums or assets to provide a new lifetime or dependants’ or nominees’ annuity. (In these circumstances regulations made under paragraph 3(2B) or paragraph 17(3) of Schedule 28 of Finance Act 2004 treat the new annuity as if it were the original annuity)
  • the surrender is made as part of a retirement-benefit activities compliance exercise (see paragraphs below for guidance on what is a retirement-benefit exercise)
  • the surrender of a prospective entitlement to authorised pension death benefits or authorised lump sum death benefits (or both) made in order to comply with the Employment Equality (Age) Regulations 2006 or the Employment Equality (Age) Regulations (Northern Ireland) 2006 (or any regulations amending or replacing them). (See from PTM071000 for guidance on what is an authorised pension death benefit or an authorised lump sum death benefit)
  • a surrender, or agreement to surrender, is made in order to fund an authorised surplus payment, (see PTM145200) - note this exception applies only to such a surrender (or agreement to surrender) made before 20 March 2014
  • the surrender, or agreement to surrender, is an assignment which is treated as an unauthorised payment (see PTM133200)
  • the surrender or agreement to surrender, is prescribed by regulations. Currently, the only regulations that have been made are the Registered Pension Schemes (Surrender of Relevant Excess) Regulations 2006 -2006/211 (see PTM092400), or
  • the surrender of a benefit to which a member (or a dependant or nominee or successor of a member) or other person in respect of a member has a prospective entitlement under a defined benefit arrangement or cash balance arrangement provided there is not a consequential increase in the actual or prospective rights of another, connected, member of the same scheme or of another person in respect of such a connected member. For this purpose, whether one member is ‘connected’ with another member is determined in accordance with section 993 of the Income Tax Act 2007 (see PTM027000).

Where the surrender or agreement to surrender is by means of an assignment which is treated as an unauthorised payment there will not also be a second unauthorised payment in respect of the surrender of benefits.

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Retirement-benefit activities compliance exercise

For the purposes of the surrender provisions above, a surrender relating to an arrangement under a registered pension scheme is made as part of a retirement-benefit activities compliance exercise if all of the conditions A to E set out below are met.

Condition A

The surrender is made in connection with the making of a new arrangement under another registered pension scheme relating to the member who is making or agreeing to the surrender.

Condition B

The original arrangement and the new arrangement relate to the same employment.

Condition C

Both the rights surrendered under the original arrangement and the rights conferred under the new arrangement consist of or include a prospective entitlement to authorised pension death benefits or authorised lump sum death benefits (or both).

Condition D

The surrender under the original arrangement and the making of the new arrangement constitute or form part of a transaction made for the purpose of securing that the activities of the original pension scheme are limited to retirement-benefit activities.

For the purposes of this condition retirement-benefit activities are defined in Section 255 Pensions Act 2004 or Article 232 of the Pensions (Northern Ireland) Order 2005.

Condition E

The rights surrendered under the original arrangement and the rights conferred under the new arrangement are not significantly different.

An example would be where an employer has an existing occupational pension scheme under which some members are only entitled to benefits in the event of their death (so the activities of the scheme are not limited to ‘retirement benefit activities’). The employer therefore terminates the arrangements under the existing scheme for the members with rights to death benefits only and sets up a new scheme providing only death in service benefits, which the relevant members are invited to join. Providing the replacement arrangements set up for the members under the new scheme provide the same level and type of benefits for them, those arrangements will be treated as having been created as part of a retirement- benefit activities compliance exercise.