PTM142000 - Other authorised payments: specific member payments
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Authorised member payments
Regulations
Arrears of pension
Contracted-out rights earned between 1961 and 1975 and restoring state pension scheme rights
Transfer to the Pension Protection Fund
Demutualisation of insurance company
Reattribution of with-profits funds in exchange for giving up rights and interests over an inherited estate
Transitional arrangements for pension schemes existing at 6 April 2006
Payments of pension advice allowance
Small lump sums and also genuine errors
Authorised member payments
Sections 160(1) and (2), sections 164 (1) (a) to (f) and sections 165 to 171 Finance Act 2004
The legislation lists all the authorised forms of pensions and lump sum payments and the circumstances in which they can be paid. It sets out the conditions and restrictions that these payments or entitlements must meet or follow in order for them to be authorised for the purpose of the tax rules for registered pension schemes.
If the payment, or part of such a payment, does not meet all conditions and restrictions imposed through the pension rules or lump sum rule it will be an unauthorised member payment and be taxed as such - unless it meets the conditions of any of the other authorised member payments.
Most of the payment conditions are defined in Acts of Parliament, but HM Revenue & Customs (HMRC) also has the power to lay regulations to describe further authorised member payments.
Regulations
The current regulations prescribing that payments of a particular description shall be authorised member payments are under the following headings:
- Arrears of pension
- Contracted-out rights earned between 1961 and 1975 and restoring state pension scheme rights
- Transfer to the Pension Protection Fund
- Demutualisation of insurance company
- Reattribution of with-profits funds in exchange for giving up rights and interests over an inherited estate.
- Transitional arrangements for pension schemes existing at 6 April 2006
- Payments of pension advice allowance
- Small lump sums and also genuine errors.
Arrears of pension
The Registered Pension Schemes (Authorised Payments - Arrears of Pension) Regulations 2006 - SI 2006/614
Where the scheme administrator was not able to trace the member in the run-up to when their benefits were due, the scheme may end up with a liability to pay an arrear of scheme pension to the member once they become actually entitled to the payment of the ongoing pension. Because of the difference between how obligations can arise under scheme rules and when the tax rules recognise an actual entitlement to the payment of pension (see PTM062800), specific provision was made in SI2006/614 to make arrear payments of scheme pensions ‘authorised payments’ under the tax rules.
This issue only really affected scheme pensions, since money purchase pots would be likely to continue to grow during any delay, and a lifetime annuity that starts later would usually pay a higher level of pension than would have been paid had the annuity begun on time - whereas for defined benefit rights, factoring in increases was not always possible, as the member’s pension level was set by the scheme rules.
These regulations operate so the payment of arrears of scheme pension which have accrued, to which the member is entitled at the time when the pension begins to be paid and which is taxable pension income within the meaning of section 579B Income Tax (Earnings and Pensions) Act 2003 is an authorised member payment.
The payment must not exceed the amount accrued during the period ending with the date on which the member became entitled to the pension (“the actual start date”) and beginning with the earliest date from which the member could, at the actual start date, have required the scheme administrator, in accordance with the rules of the scheme, to make a payment of arrears of pension.
For cases where the member has died before becoming actually entitled (according to the tax rules) to the arrear, see PTM062800.
Although as stated above a lifetime annuity that starts later than the date when it could have started under the scheme rules will usually pay a higher level of pension, due to the pot being larger than it was at the time it could have started, arrears of lifetime annuity income can also be paid as authorised pension in certain circumstances. Some annuity providers will offer an annuity contract allowing payments to be paid to the member in respect of a period before the annuity was set up, backdated to the date from which that member had the right to be paid a pension under the scheme rules.
Where an amount of arrears in respect of a period before the contract was set up was paid at the time the annuity started (and where the annuity entitlement arose before 6 April 2015), we would not consider that the ‘amount of the annuity’ had decreased, if the periodic amount paid in respect of the earlier period was paid at the same rate pro rata as the payments to be made going forward.
This is because for an annuity where the entitlement arose before 6 April 2015, it was a requirement for the annuity to qualify as a lifetime annuity that the amount of the annuity must not decrease. That condition does not apply for annuities where the entitlement arises on or after 6 April 2015. In either case, the entitlement to the lifetime annuity still arises when all the necessary steps have been taken as described on page PTM088200, and the entitlement to the pension commencement lump sum for tax purposes therefore still arises immediately before that time, with the window for paying the authorised pension commencement lump sum extending six months before and twelve months after the date of entitlement for tax purposes.
As the annuity payments paid late are considered to be authorised under section 165 FA 2004, there is no need to make provision in secondary legislation to authorise them.
Contracted-out rights earned between 1961 and 1975 and restoring state pension scheme rights
The Registered Pension Schemes (Authorised Payments) Regulations 2006 - SI 2006/209
The payment of lump sums representing commuted equivalent pension benefits (contracted-out rights earned between 1961 and 1975) is also an authorised payment providing the payment is made in accordance with the relevant DWP legislation (as described in regulation 2(a) of The Registered Pension Schemes (Authorised Payments) Regulations 2006 (SI 2006/209). HMRC legislation does not impose any additional conditions on payments of this type for them to be authorised payments. See page PTM061200 for more details.
Under regulation 2(b), (c) and (d) other lump sums payments paid by contracted-out pension schemes to restore members’ state pension scheme rights are also authorised payments when they are made by registered pension schemes.
Such payments must be made in accordance with any of the following legislation:
- section 55 of the Pension Schemes Act 1993
- section 51 of the Pension Schemes (Northern Ireland) Act 1993
- section 55(2) of the Pension Schemes Act 1993
- section 51 (2) of the Pension Schemes (Northern Ireland) Act 1993
- paragraph 5(3B)(b) of Schedule 2 to the Pension Schemes Act 1993
- paragraph 5(3B)(b) of Schedule 1 to the Pension Schemes (Northern Ireland) Act 1993.
These include state scheme premiums, contributions equivalent premiums, and some other payments to restore a member’s state scheme rights.
Transfer to the Pension Protection Fund
Regulation 2 The Registered Pension Schemes (Authorised Payments) (Transfers to the Pension Protection Fund) Regulations 2006 - SI 2006/134
A transfer of the property, rights and liabilities of a registered pension scheme to the Board of the Pension Protection Fund is to be treated as an authorised member payment.
Demutualisation of insurance company
Regulation 2 The Registered Pension Schemes (Authorised Member Payments) Regulations 2006 - SI 2006/137
A payment made in connection with the demutualisation of an insurance company, to:
- • a member of a registered pension scheme (not being an occupation pension scheme or a public service pension scheme) or
- • the beneficiary under a qualifying annuity contract
may be treated as an authorised member payment. This is providing it meets the following conditions:
- it is made in compensation for the loss of the person’s rights as a member of the insurance company, and
- it is made without a reduction in the total value of the sums and assets held for the purposes of the registered pension scheme, or the value or amount of the annuity.
‘Qualifying annuity contract’ means an annuity contract made with an insurance company:
- securing benefits from either a retirement benefits scheme, a personal pension scheme, a former approved superannuation fund (old code scheme), or a relevant statutory scheme, as defined in PTM031300; where the contract provided on 5 April 2006 for the immediate payment of benefits; or
- issued out of a trust scheme within section 620(5) Income and Corporation Taxes Act 1988, or
- which is a lifetime annuity or a short term annuity.
Reattribution of with-profits funds in exchange for giving up rights and interests over an inherited estate
The Registered Pension Schemes (Authorised Member Payments) Regulations 2007 - SI 2007/3532
These regulations provide for certain payments made by a registered pension scheme to be authorised member payments.
Payments that do not actually result in any diminution in the value of the fund of a registered pension scheme could, nevertheless, fall into the category of an unauthorised member payment.
One such example is where payments are made to those holding with-profits policies as part of an arrangement to facilitate the ‘reattribution’ of ‘inherited’ estates’. Reattribution is the process in which a business transfers the inherited estates from its with-profits fund to its non with-profits funds. The reattribution is subject to agreement of the policy holders who give up entitlement to any possible future distribution from the inherited estate and to facilitate this, incentive payments may be made to the with-profits policyholders.
This regulation applies where:
- Payments are made to, or in respect of, a person who is a member of the pension scheme. It includes a payment made to, or in respect of, a person who was a member of the scheme: for example, provided that the other conditions are met, a payment made in respect of a member who dies before the reattribution payment was made. Some with-profits policies are not held by the member but on their behalf and in such circumstances payments may be made to the member and, provided that the other conditions are met, those payments will be authorised member payments also.
- Payments are made as part of a scheme which makes a reattribution of the inherited estate of a person who carries on a with-profits business.
- Payments are made as part of a scheme sanctioned by a court of competent jurisdiction.
- Payments are to or in respect of the registered pension scheme’s with-profits policy-holders in exchange for giving up rights and interests over inherited estates, and
- The payment does not reduce the total value of the sums and assets held for the purposes of the registered pension scheme.
‘Reattribution’ means a redefinition of rights and interests of the with-profits policyholders over the inherited estates.
‘Inherited estates’ and ‘with-profits business’ have the same meaning as in the Conduct of Business source book issued by the Financial Services Authority.
Transitional arrangements for pension schemes existing at 6 April 2006
The Registered Pension Schemes (Authorised Member Payments) (No 2) Regulations 2006 - SI 2006/571
Regulations 38 to 41 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572
Certain lump sum payments made by a registered pension scheme to or in respect of a member where the entitlement to payment arose before 6 April 2006 may be classed as authorised member payments. See from PTM063100 for further details.
There are over 40 articles in the regulations, covering a wide range of issues. Most of them are covered in this manual under the issue to which they relate. Check the full version of The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (SI 2006/572) if the treatment of pre-6 April 2006 savings is not covered elsewhere.
These regulations provide for a lump sum paid in isolation (that is, without any related pension, annuity or drawdown arrangement) from a registered pension scheme to be an authorised payment (a stand-alone lump sum). The right to take a lump sum without pension annuity or drawdown must have existed at 5 April 2006. For further details, see PTM063130.
Payments of pension advice allowance {#payment_paa}
The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171
Article 53 Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 - SI 2001/544
From 6 April 2017, at the request of a member (including a person who is a member in their capacity of a dependant, nominee or successor of a member who has died) a registered pension scheme may make one payment of pension advice allowance in respect of that person in a tax year. The maximum amount of each payment is £500, and it must be paid from a money purchase arrangement or a hybrid arrangement directly to the financial advisor providing the advice. To be an authorised payment it must also satisfy the following conditions
- the payment is made for retirement financial advice (see below) provided to the member, or for the implementation of such advice,
- the member made a written request - which must have contained certain declarations (see below) - to the scheme for the payment
- the member must not have requested more than two pension advice allowance payments already (across all registered pension schemes of which they are a member) and no more than two pension advice allowance payments must have actually been made already in respect of them.
- no other pension advice allowance payment must have been made in respect of the member in the tax year in which the new written request is made,
- the advice provided must be regulated financial advice, provided by a financial advisor regulated and authorised by the Financial Conduct Authority to provide such advice.
Declarations required
The member must make a declaration that
- no more than two pension advice allowance payments have been requested and made in respect of them, across all their registered pension schemes. Note that the maximum of three payments of pension advice allowance applies per person, regardless of their capacity in relation to any particular pension scheme. For example, where a person has had two pension advice allowance payments made in relation to schemes of which they are a member in their own right, and then becomes a member of a scheme in their capacity as a beneficiary of another member who has died, only one more payment of pension advice allowance would be authorised under the tax rules for that person,
- they have not requested a pension advice allowance payment already in the tax year in which they now make a written request, and that no such payment has been made in respect of them that tax year
- the advice provided to them is regulated financial advice (see below), provided by a financial advisor regulated and authorised by the Financial Conduct Authority to provide such advice.
Retirement financial advice
The payment must be used to pay for retirement financial advice for the person requesting it, or the implementation of such advice. Regulated financial advice means advice in respect of the person’s financial position, including their pension arrangements and the use of their pension funds. HMRC is satisfied that this includes advice on how to use assets to fund care in old age, advice on whether in retirement the person will need to access sources of income other than their pension savings (for example, by equity release from their home), and advice on how to draw an income for retirement from all their pension pots and their stocks and shares ISA, but does not include inheritance tax planning or advice solely on an investment fund that will not be used for retirement income.
Regulated financial advice
Regulated financial advice means advice covered by Article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 - SI 2001/544.
Amount of payment
The amount of each payment must not exceed £500. Only one payment in respect of a person may be made in a tax year, and only three in the person’s lifetime. This means that if advice costing £375 in respect of a person is paid for using this allowance in a tax year, no further payment may be made until the following tax year at the earliest. There is no facility to carry forward any unused allowance, nor to make two payments in respect of the same person in the same tax year even if they total no more than £500.
Taxation of the pension advice allowance
The member or beneficiary is not liable to income tax on payments of the pension advice allowance made in respect of them.
Small lump sums and also genuine errors
The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171
These regulations set out two broad categories of authorised payments to, or in respect of a member. They also provide for how the payments will be taxed.
The first category is certain small lump sum payments that can be paid outside the usual conditions for a trivial commutation lump sum (see PTM063500). This category of ‘small lump sum’ payment is explained at PTM063700
The other category of payment authorises pension or lump sum payments made in cases involving certain errors, including some related arrear payments, all of which would otherwise be unauthorised. The payments covered will typically arise in unanticipated or obligatory circumstances - see PTM062800
Genuine errors that are not benefits covered by these regulations are described from PTM146000.