RPSM03105181 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Primary protection: Unauthorised lump sum payments

Scheme chargeable payments: unauthorised lump sum payments

Paragraph 30 Schedule 36 Finance Act 2004 exempts scheme administrators in specified circumstances from a tax charge that would otherwise apply under section 239 Finance Act 2004.

Section 239 Finance Act 2004 levies a tax charge called the scheme sanction charge where the scheme makes an unauthorised payment. Under paragraph 30 of Schedule 36 Finance Act 2004, this tax charge will not arise where

• an unauthorised lump sum payment is made,
• the recipient makes or has already made a valid claim for primary protection and/or enhanced protection and their lump sum rights exceeded £375,000 in value on 5 April 2006, and
• the lump sum paid to the recipient would have been an authorised payment (a pension commencement lump sum) had the operation of paragraphs 2 and 3 Schedule 29 not been modified to reduce the permitted maximum or applicable amount because the recipient had protected lump sum rights.

The effect of paragraph 30 is that a scheme administrator is not liable to a tax charge where he pays a lump sum not exceeding 25% of the value of the benefits coming into payment to a recipient who has not used up all of their standard lifetime allowance. The excess amount is however still an unauthorised member payment so the member will still be liable to the unauthorised payments charge.

RPSM03105182 gives an example.