RPSM09100120 - Technical Pages: Member benefits: Overview: Payments: An authorised member payment

An authorised member payment

Benefit payments

A registered pension scheme is only authorised to pay out benefits to or in respect of a member in two forms, either as a pension and/or as a lump sum.

The legislation lists all the authorised forms of pensions and lump sum payments, the circumstances in which they can be paid, and sets out the conditions and restrictions that these payments or entitlements must meet or follow in order for them to be authorised.

These are referred to in the legislation as ‘the pension rules’ and ‘the lump sum rule’. The pension rules set out the rules relating to the payment of pensions by registered pension schemes to their members. The lump sum rule simply lists the different acceptable lump sum payments and the conditions a payment must meet in order to be classified as such a lump sum payment. Most of these payments are defined in Acts of Parliament, but HMRC also has the power to lay regulations to describe further authorised member payments.

If the benefit 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.

There are also rules governing payments made by a registered pension scheme following the death of a member referred to as the pension death benefit rules and the lump sum death benefit rule.

The first two authorised member payments permitted by the legislation are:

• pension benefits permitted by the pension rules or pension death benefit rules, and
• lump sum payments permitted by the lump sum rule or lump sum death benefit rule.

Other authorised member payments

The following are also authorised member payments

• a transfer payment from one registered pension scheme to another, or to a qualifying recognised overseas pension scheme (what is referred to in the legislation as a recognised transfer),
• a scheme administration member payment (see RPSM09106000), or
• payments related to a pension sharing order.

Regulations

HMRC also has the power to make regulations to prescribe that payments of a particular description shall also be an authorised member payment.

The Registered Pension Schemes (Authorised Payments - Arrears of Pension) Regulations 2006 - SI 2006/614

Difficulties can arise when pensions are not paid on time. A basic example can be seen where the scheme administrator was not able to trace the member in the run-up to when their benefits were due, and the scheme ends 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 RPSM11102050 for examples), specific provision was made to authorise such arrear payments under the tax rules.

The problem only really affected scheme pensions, since money purchase pots would simply continue to grow during any delay, and a lifetime annuity that starts later would just pay a larger level of pension. But for defined benefit rights, factoring in increases was not always possible, so we now have the ‘Arrears of Pension’ Regulations 2006 - SI 2006/614.

These regulations operate so the payment of arrears of 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 ITEPA2003 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 RPSM09108030.

[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 SI 2006/209). HMRC legislation does not impose any additional conditions on payments of this type for them to be authorised payments. See page RPSM09105300 for more details.

Under regulation 2(b), (c) and (d) other lump sums payments paid by contracted-out pension schemes to restore members’ state scheme rights are also authorised payments when they are made by registered pension schemes. See page RPSM09107000 and following pages for more details.

[Reg 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.

[Reg 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 occupational 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 RPSM02100020; where the contract provided on the 5th of April 2006 for the immediate payment of benefits; or
• issued out of a trust scheme within section 620(5) ICTA 1988, or

which is a lifetime annuity or a short term annuity.

[The Registered Pension Schemes (Authorised Member Payments) Regulations 2007 - SI 2007/3532]

These regulations provide for certain payments made by 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 estates and to facilitate this, incentive payments may be made to the with-profits policyholders.

This regulation applies where:

• Payments are 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 with 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.

[The Registered Pension Schemes (Authorised Member Payments) (No 2) Regulations 2006 - SI 2006/571]

[Regs 38-41, 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 RPSM03111000 for further details.

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 RPSM03105640 and following pages.

[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 RPSM09104910 to RPSM09105080) . This category of ‘small lump sum’ payment is explained in RPSM09105400 onwards.

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 RPSM09108000 onwards).