RPSM09101600 - Technical Pages: Member benefits: A secured pension: Scheme pension: Stopping or reducing a scheme pension: Avoidance arrangements

The imposition of an additional unauthorised payments charge on the member where there are avoidance arrangements

A scheme may provide for a scheme pension to be reduced where the rate of reduction is being applied scheme wide to all scheme pensions currently payable from the scheme (see RPSM09101530).

However, if a scheme uses this relaxation as part of a wider arrangement with the member(s), where the intent is to manipulate the member’s entitlement to a tax-free pension commencement lump sum, an unauthorised payments charge will become due at the point of reduction. The tax is charged on the level of lump sum originally paid to the member (the appropriate amount). So this charge will apply where the scheme artificially raises the member’s initial rate of pension in order to increase the maximum pension commencement lump sum payable, with no intention of maintaining this rate for the lifetime of the member. This is referred to in the legislation as ‘avoidance arrangements’.

The term avoidance arrangements covers any scheme, arrangement or understanding of any kind (whether legally enforceable or not).

RPSM09101630 gives an example.