RPSM13102207 - Technical pages: International: Application of charges to non-UK schemes: Member payment charges and taxable property unauthorised payment charge: Determining if any unauthorised payments charge arises where lump sum paid

Determination of whether or not an unauthorised payments charge arises where lump sum paid from a relevant non-UK scheme

[Paras 1 - 3, Sch 29][Paras 3(6) & 4(4), Sch 34][The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207] 

Where a member receives benefits from a relevant non-UK scheme (see RPSM13102130) a lump sum payment may give rise to an unauthorised payments charge by virtue of schedule 34. It will do so to the extent that it exceeds a pension commencement lump sum (see RPSM09104220).

The maximum level of pension commencement lump sum payable is calculated on the same basis as if the payment were made from a registered pension scheme, but by reference only to those benefits coming into payment that are attributable to the member's UK tax-relieved scheme funds. Any other funds under the scheme should not be taken into account when determining whether or not a lump sum payment will give rise to an unauthorised payments charge

The member's UK tax-relieved scheme funds are made up of any UK tax-relieved fund (see RPSM13102150) and of any relevant transfer fund, which includes any taxable asset transfer fund (see RPSM13102170). Payments made by a relevant non-UK scheme are attributable first to the member's UK tax-relieved scheme funds and then to any other funds under the scheme (see RPSM13102190).

In broad terms, a pension commencement lump sum cannot be greater than one third of the capital value of the relevant pension which the lump sum is paid in connection with. Nor can it be greater than 25% of so much of the standard lifetime allowance as has not been used up by the member before the entitlement to the lump sum arose.

Generally speaking, this means that if at least 75% of the capital value of the benefits coming into payment that are attributable to the member's UK tax-relieved scheme funds is used to provide a relevant pension (see RPSM09104130) the lump sum payment will not give rise to an unauthorised payments charge. In effect, the lump sum attributable to the member's UK tax-relieved scheme funds will be a pension commencement lump sum because it is "franked" by the relevant pension. If some (but not all) of the benefits paid out of the member's UK tax-relieved scheme funds are in the form of a lump sum then an unauthorised payments charge will arise on any excess of the lump sum over the amount representing one third of the capital value of the relevant pension.

But if only a lump sum is paid and entitlement to a relevant pension does not arise within 6 months of the lump sum payment, then all of the lump sum that is attributable to the UK tax-relieved scheme funds will be subject to such a charge. That is because under paragraph 1(1)(aa) of schedule 29 there can be no pension commencement lump sum where the member does not become entitled to a relevant pension in connection with the lump sum (see RPSM09104270).

For a lump sum to be a pension commencement lump sum it has to be paid within the 18 month period starting 6 months before and ending 12 months after the date of actual entitlement to the connected relevant pension (see RPSM11102050 and RPSM09104130).

The same approach applies whether benefits are paid in full or in tranches. Generally speaking, where a first tranche of benefits is paid a lump sum will not give rise to an unauthorised payments charge if at least 75% of the benefits that are then paid out of the member's UK tax-relieved scheme funds is used to provide a relevant pension.

Where payment is made from a defined benefits scheme the capital value of the scheme pension should be calculated using a relevant valuation factor of 20 (unless a higher factor has been agreed with HMRC by the scheme manager). There is further information about the relevant valuation factor at RPSM11104220.

Examples of the determination of whether or not an unauthorised payments charge applies where benefits are paid by a relevant non-UK scheme are provided in RPSM13102208.