RPSM09101590 - Technical Pages: Member benefits: A secured pension: Scheme pension: Stopping or reducing a scheme pension: Additional unauthorised payments charge

The imposition of an additional unauthorised payments charge on the member following a substantial reduction of a scheme pension

If in circumstances other than those listed in RPSM09101510 the rate of scheme pension payable is reduced beyond a certain level (or payments stop entirely) then the member will become liable to an unauthorised payments charge on what the legislation calls the ‘appropriate amount’. This charge is at the rate of 40%.

This charge is in addition to the unauthorised payments charge imposed on the actual continued payments of pension made in that and subsequent years, if any (see RPSM09101580).

This additional charge arises where the rate of scheme pension payable is substantially reduced in any relevant 12-month period by reference to the annual rate of entitlement that was in force at the time entitlement to that pension arose. The substantial reduction may occur at the same time the pension ceases to be a scheme pension, or it could be in any subsequent relevant 12-month period. What the legislation means by relevant 12-month periods is covered in RPSM09101260.

What is a substantial reduction?

The legislation defines a substantial reduction as being the reduction of the rate payable to less than 80% of the annual rate of scheme pension payable when the member first became entitled to the pension.

So if a member becomes entitled to a scheme pension at the rate of £10,000 per annum, then if the rate paid in any future relevant 12-month period falls below £8,000 there has been a substantial reduction (and an additional charge is triggered). That £8,000 payment would also be caught by an unauthorised payments charge, as that pension would no longer represent a scheme pension (but be an unauthorised member payment). Any future payments would be treated the same way.

What is the appropriate amount?

The appropriate amount is defined in RPSM09101580 and is simply the amount of tax-free lump sum that was paid to the member in connection with the entitlement to that scheme pension. So the pension commencement lump sum paid at that time (if any).

RPSM09101620 gives an example.