RPSM09101630 - Technical Pages: Member benefits: A secured pension: Scheme pension: Stopping or reducing a scheme pension: Example with avoidance arrangements

Example showing how the additional unauthorised payments charge is applied where avoidance arrangements occur

There are three members of a registered pension scheme. Two members draw benefits at age 60.

Both are awarded scheme pension entitlements at the rate of £40,000 per annum. But this is on the understanding that both their pensions will drop to £10,000 per annum in two years time.

This higher initial annual pension rate enables the members to take a much higher tax free pension commencement lump sum entitlement under the scheme rules of £250,000 each.

When the scheme pension is reduced an unauthorised payments charge becomes due on an appropriate amount of £250,000 (the tax-free lump sum paid two years previously). This is because the reduction, whilst scheme wide and within the exempted circumstance, is part of avoidance arrangements to obtain a bigger tax free lump sum.

The two members each become liable to an unauthorised payments charge of £100,000 (40% of £250,000).

The continued pension paid at the rate of £10,000 per annum is still a scheme pension, and the payments themselves are not subject to future unauthorised payments charges (and are taxed under PAYE as pension income, as with the first two years of payment).

If one (or both) of those £10,000 per annum pensions is (are) reduced again in the future then an additional unauthorised payments charge of £100,000 will not be triggered again on the appropriate amount. But that does not mean that that those future pension payments beyond the second reduction can’t be charged as unauthorised member payments if the second reduction is not within the exempted circumstances.