RPSM11102100 - Technical Pages: Lifetime allowance: When you test for the lifetime allowance: Unauthorised payments

An unauthorised member payment and the lifetime allowance

Where scheme funds are used to provide a benefit or make a payment that does not conform with the pension rules, lump sum rule or lump sum death benefit rule (and is not one of the other authorised member payments) that payment is an unauthorised member payment.

An unauthorised member payment is not caught by any of the eleven BCEs and will never trigger a lifetime allowance test. This is because an unauthorised member payment will attract certain tax charges in its own right.

For example, if a lump sum is paid which is not linked to the commencement of a pension benefit (so is not a pension commencement lump sum) a lifetime allowance test is not triggered as it is not caught by BCE 6. That is because the payment does not comply with the lump sum rule. The payment would, however, be taxable on the individual as an unauthorised member payment.

The tax due on an unauthorised member payment is charged at the rate of 40% (the unauthorised payments charge).

Payment of an unauthorised member payment will also trigger a liability for a scheme sanction charge, unless within narrowly defined exceptions - see RRSM04104810 for more information. The rate of charge here on the scheme administrator starts at 40%, although credit is given up to a point for any unauthorised payments charge paid by the member. Even so, the level of scheme sanction charge due cannot be reduced below 15% of the unauthorised member payment.

The effective rate of charge on the unauthorised member payment will therefore match the highest rate of lifetime allowance charge - 55%.

In addition, if the level of unauthorised member payment made is sufficient in size in comparison to the member’s total benefits held under the paying arrangement, the member will also become liable to a 15% surcharge in addition to the 40% unauthorised payments charge. This surcharge does not reduce the rate of the scheme sanction charge due. For more information on this unauthorised payments surcharge see RPSM04104610.

A lifetime allowance test is therefore only triggered when a member becomes entitled to certain authorised member payments, or where undrawn benefits are subject to a BCE on their 75^th birthday. If, at an earlier point, the member dies and a relevant lump sum death benefit is subsequently paid, then a test is triggered at that point.