This month's Newsletter, published today, is shorter than usual. Topics covered include the following.

1. Interest paid with lump sums (eg Short Service Refund Lump Sums)

This issue is a chronic and common irritant, involving small amounts of money which have to be accounted for separately from the lump sum itself. As long as the interest is reasonable in amount - paid at a commercial rate, it will be a scheme administration member payment. The Scheme Administrator should make the interest payment gross (unless made to a non-resident) and the recipient should include the interest in a self-assessment tax return.

A short service refund lump sum cannot be more than the total amount of the actual contributions paid by the member to the scheme (RPSM 091.04.740). The legislation does not build in any interest calculation in to the limit on the short service refund lump sum, neither is any account taken of any growth of those contributions over time.

Where the amount of contributions are refunded up to the short service refund lump sum limit, ie the total amount of the actual contributions paid by the member (FA 2004 Sch 29 para 5 (2)), clearly then no element of interest can be included as part of the lump sum. If any interest is paid, it must be a separate payment.

If the contributions to be refunded are less than the limit, however, then depending on the scheme rules, schemes may be able to provide for interest to be paid as part of the short service refund lump sum. Such an opportunity might be considered to arise where the scheme is required to pay a Contributions Equivalent Premium (CEP) to HMRC to 'buy' back the member into the State Second Pension (formerly SERPS). The Scheme Administrator is permitted to deduct the employee's share of a CEP before paying the refund (see RPSM 091.04.730).

If the total amount is within the amount of contributions the member has paid, it will all be taxed under FA 2004 s.205, ie 20% on the first £10,800 and 40% on any excess.

2. Overpayments made in Error

The Newsletter announces a pragmatic 'de minimis' solution to another fairly common event involving payment of small amounts which under the new regime are treated as unauthorised payments.

Some pension schemes have rules which allow them not to pursue overpayments of pensions below a certain amount if they cannot be recovered or because recovery is considered likely to be disproportionately expensive. Annuity providers may adopt the same practice. Typical examples of this are where pension payments are made after the recipient has died, where the overpayment is due to a delay in the Scheme Administrator being notified, resulting in one or more pension instalments actually being paid after the date of death.

HMRC has considered the position of these payments, in particular the significant administrative costs in dealing with the assessment and collection of such small unauthorised payments. So although these overpayments are unauthorised payments, HMRC is pleased to confirm that providing that the payment was

• made in error and
• was less than £250 and
• was not a lump sum (the £250 limit applies to write-offs of overpaid pension only) and
• relates to a pension paid after A-day,

then the payments do not need to be reported on the scheme Event Report nor will the recipient need to report it on their own self-assessment return.

Further guidance on this will be included within the Registered Pension Scheme Manual RPSM in due course. (HMRC has said that while it regards the RPSM as now 'fairly stable' and not likely to require any further radical revision as a result of significant changes in the FA 2004 regime, nevertheless discovery of errors and omissions as well as relaxations like this one will continue to trigger amendments.)

3. Winding-up lump sums and employer undertakings

Before payment of a winding-up lump sum the member's employer is required to give a written undertaking to HMRC not to make any contributions in respect of the member for a year after the lump sum is paid (paragraph 10(3)(c) Sch 29 FA 2004). The undertaking is required from all current and former employers that have contributed to the scheme in respect of the member(s) who are to receive a winding up lump sum.

Quite commonly in a winding-up situation, the employer(s) might be unable to provide this undertaking because they no longer exist. From now on, where the employer is no longer in existence then the condition in paragraph 10(3)(c) can be treated as having been complied with. The relevant page in the RPSM (RPSM 091.05.110) will also be amended in due course.

4. E-mandation

HMRC will shortly be seeking views on when 'e-mandation' should be introduced for registering new pension schemes and the submitting of pensions reports and returns.

5. Pre A-day PS Forms

Please don’t send in old style PS forms for events occurring post A-day. They won't be accepted. If Scheme Administrators wish to report changes on paper forms they should submit an APSS 152 [PDF] instead of a PS256/PS257.