RPSM09101620 - Technical Pages: Member benefits: A secured pension: Scheme pension: Stopping or reducing a scheme pension: Example of unauthorised payments charge

Example showing how the additional unauthorised payments charge is applied where a substantial reduction in the rate of scheme pension occurs in non-exempted circumstances

John becomes entitled to a scheme pension of £20,000 per annum on his 65th birthday on 10 January 2007. This is increased by 5% per annum under the scheme rules.

This entitlement gives rise to a £50,000 pension commencement lump sum.

On 1 April 2008 the rate of scheme pension payable to John is reduced to £15,000 per annum.

The annual rate of pension payable in the relevant 12-month period of 1 April 2008 to 31 March 2009 is therefore £15,000 per annum.

The rate of pension payable immediately before this 12-month period (on 31 March 2008) was £21,000 per annum (the £20,000 starting pension, plus the first annual increment of 5%).

This reduction is not due to a court order or pension sharing order, the operation of a forfeiture clause or the abatement of a pension under a public service pension scheme. Nor is it a reduction due to the commencement of a state retirement pension, or a scheme- wide imposed reduction. So the reduction is not exempted from the condition that the annual rate of scheme pension may not reduced year to year.

As such the pension ceases to be a scheme pension. All future payments from 1 April 2008 onwards therefore represent unauthorised member payments. John will be subject to a 40% unauthorised payments charge on those payments.

In addition the reduced rate payable in the relevant 12-month period of 1 April 2008 to 31 March 2009 (£15,000) is less than 80% of the rate payable on the arising of that pension entitlement on 10 January 2007. (80% of £20,000 = £16,000.)

So John also becomes liable to an additional unauthorised payments charge on 1 April 2008 on the level of tax-free lump sum paid back in early 2007 (the appropriate amount) as a substantial reduction has occurred. This is £20,000 (40% of £50,000 pension commencement lump sum).

If the continuing pension payments are reduced in the future then no further additional unauthorised payments charge will be triggered on the appropriate amount. As one charge has been levied already on the appropriate amount no further additional charge could be levied.