RPSM12101040 – Technical Pages: Information Requirements and Administration: Genuine errors: Inadvertent unauthorised payments: Pension instalments or lump sums not exceeding £250 in total that are unauthorised payments

Inadvertent overpayments: Pension instalments or lump sums not exceeding £250 in total that are unauthorised payments

Due to a genuine error, a pension payable under a registered pension scheme, or an instalment of such a pension, could be paid inadvertently and in circumstances where the payment of that pension means that an unauthorised member payment has occurred. A pension could include a scheme pension or a lifetime annuity. Similarly, an overpayment of a lump sum may occur, as in example 1 of RPSM12101030

Example 1

A condition that a member’s pension payable under a registered pension scheme must meet in order for it to be an authorised member payment is that the pension must stop being paid after the member’s death, except where the pension can be paid under a term certain (see RPSM09101280). However, pension instalments might continue to be paid after the member’s death because the pension payer was unaware of the death at the time the post-death instalments were paid.

Example 2

A pension being paid to a dependant who is child of a deceased member must stop because that person is about to reach age 23 and does not otherwise qualify for the continuation of that pension. In preparing for this eventuality, the pension payer gives clear and timely warning to the bank to stop payments from the necessary date but the bank fails to act on those instructions.

In both of these examples, if the error was spotted and rectified (pension overpayments were repaid) as soon as reasonably possible, the inadvertent pension instalments would not be unauthorised member payments (see RPSM12101020).

However, there would be an unauthorised member payment if, despite the error being spotted, it is decided the repayment of the inadvertently overpaid pension instalments will not be pursued or the scheme does attempt recovery but is unsuccessful and eventually decides to write off the overpayment (even though the decision might be taken on administration costs grounds or out of sensitivity).

The date of the unauthorised payment for the purpose of having to make a report of that payment would be the date that the decision is made not to seek recovery of the overpayment or the date the decision is taken to no longer seek recovery of the overpayment, as the case may be.

Where the overpayment is not pursued or, otherwise, not successfully pursued and the total of such overpaid pension instalments paid after 5 April 2006 (overpaid instalments paid before 6 April 2006 do not count for this purpose) to, or in respect of, a particular member does not exceed £250:

• for its own reasons of cost administration, under its Collection and Management powers, HM Revenue and Customs will not seek to collect the tax that, in strictness, is due in respect of the unauthorised payment (although the payment remains an unauthorised payment), and
• the scheme administrator does not have to report the unauthorised payment to HM Revenue and Customs (see RPSM12301030), and
• the unauthorised payment does not have to be returned on the recipient’s self- assessment tax return or, otherwise, be notified to HM Revenue and Customs (see RPSM04104520).

If the aggregate overpayment exceeds £250, then all of the overpayment is chargeable as an unauthorised payment (i.e. one cannot deduct £250 as if it were an allowance, which it is not).

For this purpose, the £250 threshold applies to the aggregate of the overpayments actually received by, or in respect of, the member.

Overpayment of Lump sums

The conditions described above apply equally where an overpayment of a lump sum occurs, such as a pension commencement lump sum or serious ill-health lump sum. So the limit of £250 will apply, but any lump sum in excess of that amount, where recovery cannot be made, will be an unauthorised payment to the extent that the amount is not an authorised payment.

For example, a pension commencement lump sum of £100,000 is due to be paid under the scheme rules, but £105,000 is paid in error. The scheme administrator is unable to affect a recovery of the excess. Under the tax rules, the pension commencement lump sum of £100,000 is the permitted maximum, so the whole excess of £5,000 is an unauthorised payment (i.e. one cannot deduct £250 as if it were an allowance, which it is not).