Pension payments must follow specific tax rules set forward by the government. These rules specify the conditions that need to be met for payments to be considered authorised. Anything outside these parameters will fall foul of the rules and automatically face negative consequences.
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The government provides a list of common situations where payments are classed as unauthorised. This includes:
- Trivial lump sums in excess of £30,000
- Continued payments of pension after the member’s death
- When a scheme realises it incorrectly calculated the amount of the member’s pension pot following a transfer of funds or purchase of an annuity and the balancing payment is made directly to the member
- Most lump sum payments to cash-in or access pension funds before age 55
There are some exceptions for when it is acceptable to take a lump sum payment before turning 55.
It will be acceptable if the member retires due to ill health, or if prior to 6 April 2006 the person had the right under the pension scheme to take their pension before age 55.
Certain movements of funds within a pension scheme are also classed as unauthorised payments but these may be harder to identify, as many pension schemes are run by a provider and not the holder themselves.
There are some actions that can be easily identified by a person however that will identify what the government refers to as unscrupulous firms.
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These kind of companies will provide misleading information to promote personal loans or cash incentives that aim to entice savers to unlock their pension pots early.
Often, these firms will detail that they know of a legal loophole that can be used so that the person doesn’t have to pay tax.
The government states very clearly that there is no legal loophole and these type of transactions will always be considered unauthorised payments.
If an unauthorised payment has occurred three separate tax charges will be due. These charges are the:
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- unauthorised payments charge
- Unauthorised payments surcharge
- Scheme sanction charge
The unauthorised payments charge
If an unauthorised payment is made, either to or for a member, it will be the member themselves who is responsible for paying this tax charge.
This will be the case even if the member never received the initial payment. This will be slightly different where a payment is made to or for an employer participating in an occupational pension scheme.
In this instance, the employer will be subject to the tax charge. The current rate of unauthorised payments charge is 40 percent.
The unauthorised payments surcharge
This surcharge will be payable by the same person who was subject to the initial unauthorised payments charge. It usually occurs where a member gets unauthorised payments of 25 percent or more of their pension pot in a year, or when an employer gets unauthorised payments of 25 percent or more of the value of the pension scheme in a year. The rate for this surcharge is currently 15 percent, meaning that a member could pay a total of 55 percent.
The scheme sanction charge
This charge mainly concerns scheme administrators. The administrator must pay the scheme sanction charge on most unauthorised payments, unauthorised borrowing and/or investments in “taxable property”. The charge here is between 15 and 40 percent but the actual amount is dependant on whether or not the unauthorised payments charge has been paid
These charges must be paid through either a mandating procedure or a self assessment tax return.
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