RPSM09108040 - Technical Pages: Member benefits: Payments covered by Regulations: Commencement lump sums paid in error
[Regs 17 and 18 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171]
Where there is an error in the provision of a pension commencement lump sum which results in an over-payment of the lump sum, and the error occurs in good faith, these regulations provide that the over-payment can stand without becoming subject to the unauthorised payment charges that would otherwise apply.
The effect is that the over-paid lump sum is accepted as an authorised payment and provided it remains within the member’s available lifetime allowance, is made tax free as a pension commencement lump sum would be.
This provides that if a payment is intended to be a pension commencement lump sum, (see RPSM09104100) but ends up exceeding the permitted maximum (see RPSM09104220), it may still be an authorised member payment so long as the lump sum exceeds the permitted maximum only because it has been calculated by reference to the amount of a relevant pension (as defined on RPSM09104130, although in practice this will mean an amount of scheme pension) and either:
- the pension provided had a payment error (e.g. overpayment) within Regulation 13 (see RPSM09108010: pension errors made before the discovery of an error), or
- the pension provided had a payment error within Regulation 14 (1) (b) (see RPSM09108010: pension paid after the discovery of the error), or
- the lump sum is paid before the relevant pension starts, and
- the relevant pension is not paid, or not paid in the amount originally intended, because an error is discovered, and
- if the error had not been discovered and the pension had been paid as intended, its payment would have been a payment within Regulation 13.
Because lump sums may be paid at a different time to the start of the pension, the regulation specifically allows that the above options apply even if the error is discovered before the lump sum is paid. This is however on the condition that the payer took reasonable steps to prevent the over-payment being made. The regulation does not define what is reasonable, as that will depend on the facts in any given case. ‘Steps’ are also undefined for the same reasons.
Astute readers will have noticed that the second bullet above omits any link to Regulation 14(1)(a). This is because pension commencement lump sums are always linked to the point of entitlement to a related pension. The link is therefore primarily ‘interested’ in the situation at the start of the pension, rather than what happens to the pension later. Regulation 14(1)(a) covers the ongoing pension payments that follow on from a pension that started in a situation subject to regulation 13. I.e. the first bullet should already cover any scenario that 14(1)(a) might later apply to.
This applies in the specific case where a money purchase arrangement is used to purchase an annuity for a member. In such a case the amount of pension commencement lump sum is calculated by reference to the annuity purchase price. If it then turns out there was an error in the calculation of the purchase price the lump sum can be found to have been overpaid.
For example, a valuation error can mean the value of the money purchase arrangement was overstated. It is not then possible to pay enough for the annuity to justify all of the lump sum as a pension commencement lump sum.
The conditions for such an overpayment to be authorised are:
- the whole of the lump sum must have been intended to be a pension commencement lump sum,
- the only reason the payment exceeded the permitted maximum must be down to an error in the calculation of the associated annuity purchase price (not simply due to an investment related variation in value between different valuation dates),
- the intended annuity is either a lifetime annuity or a scheme pension,
- the lump sum is paid ahead of the annuity purchase, and
- once the error is discovered, the annuity is either:
- purchased for a smaller amount, or
- not purchased at all
BCE 6 & 9
In the case of either of the above two regulations, if a pension commencement lump sum is over-paid, such a lump sum will have two elements:
- The first is the portion that counts as a normal pension commencement lump sum, and is subject to BCE 6 in the normal way (see RPSM11104700).
- The second is the overpaid portion of lump sum, which is in addition to the legitimate pension commencement lump sum. The amount of this overpayment establishes the amount crystallised under BCE 9. Although BCE 9 is calculated according to the amount of the overpayment, it is actually triggered by the member becoming entitled to the underlying pension commencement lump sum.
The two BCEs therefore run simultaneously, accounting for the two different elements of the lump sum.