Since 6 April 2006, schemes have been wrestling with the complexities of aspects of the new pensions tax regime under the Finance Act 2004. This LawNow focuses on two such areas, overpayments and trivial commutation lump sums, in relation to which draft Regulations issued by HMRC aim to create new categories of "authorised payment" to allow schemes more flexibility.
Overpayments
From A-Day, any payment made by a registered pension scheme to a member which is not expressly authorised by the Act is treated as unauthorised and subject to punitive tax treatment (attracting an initial charge to tax of 40%, as well as other potential charges). Although HMRC published subsequent guidance to give limited relief in relation to "genuine errors", this only applies to sums up to £250. Otherwise, there is no discretion for a mistaken payment to be treated in the same way as other payments of pension or lump sum.
This has created particular issues where pension has
initially been paid at too high a rate and then corrected to
its initial level. Despite the fact that trustees may not be
able to recover the overpayment, HMRC had indicated that any
part of the original overpayment that is not recouped should be
treated as unauthorised.
The Regulations will change this position, with retrospective
effect to 6 April 2006, to allow overpayments of pension paid
in error to be treated as authorised payments. However, this
will be subject to it having been "reasonable for the
scheme administrator to have believed that... the recipient was
entitled to the payment". The Government reiterated
in Committee this month that "payments, often in
innocent error, such as an overpayment of an ongoing
pension" should "be taxed in the same way as
authorised payments from pension schemes." But if the
suggestion is that the error should also meet a reasonableness
test, then the wording of the draft Regulations risks
undermining this policy intention.
Trivial commutation
The A-Day trivial commutation requirement is that benefits under all schemes must be taken into account. This has meant that many members left with one or more small, so-called "stranded" pension pots are unable to take a trivial commutation lump sum because the total value of rights in their schemes is above the global trivial commutation limit, currently £16,500.
The Regulations introduce an additional facility to allow stranded pots with a value of up to £2,000 to be paid to members. However, it seems that the £2,000 limit is still to apply to the total value of pension rights under all schemes relating to the same employment, which must be paid out at the same time. In addition, no payment can be made where the member has taken a transfer from any such scheme in the previous 3 years. Again, such restrictions seem at odds with a policy intention of easing administrative burden.
The draft regulations, which can be viewed here may, of course, be subject to further change.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 16/06/2008.
