RPSM09101580 - Technical Pages: Member benefits: A secured pension: Scheme pension: Stopping or reducing a scheme pension: Consequences

Consequences of reducing or stopping a scheme pension, other than in the exempted circumstances

If the rate of scheme pension payable to an individual is reduced in any circumstance other than those allowed by the legislation the reduced payments, then all future payments will not represent payments of a scheme pension but be unauthorised member payments, and be taxed as such. In other words the pension will fall outside of the scheme pension definition as soon as the reduction occurs.

There are also three circumstances where an additional unauthorised payments charge will arise on what is called the ‘appropriate amount’ (see below). These circumstances are where

• other than in the exempted circumstances, the payment of a scheme pension is stopped entirely in the member’s lifetime, and so contravenes the requirement that the scheme pension must be paid for life,
• other than in the exempted circumstances, the rate of scheme pension payable in a relevant 12-month period is reduced to a level that is a substantial reduction from the initial rate of pension payable when entitlement to that pension first arose (see RPSM09101590, or
• a scheme pension is reduced by a rate that has been applied to all other scheme pensions being paid under the scheme (so is an exempted circumstance – see RPSM09101530), but the reduction is deemed to be part of ‘avoidance arrangements’ (see RPSM09101600). Here the ongoing pension payments still represent scheme pension payments (so they are not unauthorised member payments), but an unauthorised payments charge becomes payable on the appropriate amount.

To re-iterate, in the circumstances laid out in the first two bullets, this charge on the ‘appropriate amount’ is in addition to any charge due on any ongoing pension payments.

This charge can be imposed only

• once on a scheme pension entitlement (see RPSM09101610), and
• on a member’s scheme pension – the additional charge does not catch the payment of a dependants’ scheme pension. Such pensions may be reduced without triggering such a charge.

The appropriate amount

The appropriate amount is the amount of any tax-free lump sum paid by the scheme in connection with the commencement of that scheme pension entitlement. So the charge is negating the tax benefit afforded with the original lump sum payment.

Under the tax rules, the maximum pension commencement lump sum payable is calculated by reference to the initial annual rate of scheme pension coming into payment at the time entitlement to that pension arises. The purpose of the additional charge is to ensure that this tax-free lump sum entitlement is not manipulated, and that scheme pension levels are set at a level that will provide a constant income for that individual’s lifetime.