Other authorised payments: Genuine errors: A “genuine error”
A ‘genuine error’
The facts and circumstances of a payment will determine whether or not the error resulting in that payment can be said to be a truly genuine error. Most typically these will be payments made as a result of an inadvertent administrative failure or because of circumstances that were beyond the control of the registered pension scheme making the payment or beyond the control of the person making an inadvertent payment to the scheme.
A member is about to receive a pension commencement lump sum of £25,000, which, in the circumstances of the member, is the maximum amount payable under the tax rules - see PTM063210. However, due to a transposition error within the administration department of the pension scheme in question, the member’s bank account is accredited with £52,000 instead.
On receiving the unexpected amount, the member contacts the administration department of the pension scheme immediately and, without delay, the member pays back £27,000 to the pension scheme in recognition of the error that had occurred.
A member takes benefits from a money purchase arrangement in the form of designating sums and assets for drawdown pension and a pension commencement lump sum. As it is agreed between the member and the scheme manager that for the lump sum to be a pension commencement lump sum one of the conditions must be that its amount must not exceed one third of the aggregate of the amount of cash and the market value of the assets so designated (PTM063230), the scheme manager obtains the up to date and independent market valuations of the respective assets in question. The lump sum is then paid accordingly in the belief that all of the necessary conditions have been met for the lump sum to be the pension commencement lump sum that was agreed would be paid.
A year later, there is a review of the designated sums and assets and it is decided to sell one of those assets. In obtaining a further market valuation of that asset it comes to light that, due to a mistake by the independent valuer, the market value of the asset had been incorrectly overstated 12 months earlier as part of the preparation for paying the pension commencement lump sum which meant that some of the lump sum actually paid was excessive in relation to the necessary conditions for a pension commencement lump sum.
Upon spotting the error, the scheme manager immediately requests repayment of the excessive amount of lump sum paid as there had been no intention to pay that amount and that erroneous payment is put back into the scheme’s bank account as soon as reasonably possible.
On approaching normal minimum pension age which, for the member concerned, occurs on 1 July 2015, the member requests payment of benefits from the pension scheme on that date. To meet this request, the administration department of the pension scheme instructs the scheme’s bank to arrange for the necessary payment to be made into the member’s bank account on 1 July 2015. However, due to an oversight at the scheme’s bank, the payment is made on 1 May 2015 instead.
As part of an audit process within the administration department of the pension scheme, the error is spotted before 1 July 2015. The member is contacted immediately and the erroneous payment is put back into the scheme’s bank account without delay.
An employer automatically deducts contributions from a new employee’s first salary payment at the rate required as a condition of membership of that employer’s registered pension scheme.
The deduction is spotted by the employee, who queries the deduction immediately as the employee had no intention of joining the scheme (alternatively, the employee’s membership application might have been rejected). To rectify the matter, the scheme makes a payment back to the employee immediately to cover the mistaken contributions paid to the scheme by the employer out of the employee’s salary.
The overpayment in Examples 1 and 2 and the early payment and returned payment in Examples 3 and 4, respectively, will not be unauthorised member payments as the payments were made as a result of a genuine error and the errors were spotted and rectified as soon as reasonably possible.
In Example 3, if the error is not spotted until 1 July 2015, or later, and it is decided not to take any further action because a time had been reached in which the payment could ordinarily have been made in accordance with the rules for authorised member payments, that inaction would signify that the payment had been made earlier than intended. This would mean that there had been an unauthorised payment.