Under the FA 2004 pensions tax regime, the only payments which can be made by registered pension schemes without attracting a tax penalty are defined by s.164*. Any payment which is not covered by s.164 is either an Unauthorised Member Payment (UMP) or an Unauthorised Employer Payment (UEP). An unauthorised payment incurs a tax charge on the member or the employer, as the case may be, of at least 40%. A 15% surcharge is levied where the UMP or UEP exceeds a 25% of fund threshold.

* as amended by FA 2006 Sch 23 para 6; FA 2008 Sch 29 para 1(2); and FA 2009 s.75 (2)(a).

Unauthorised payments are an enormous problem for UK pension administrators. Most unauthorised payments are not intentional on the part of the member, the employer or for that matter, the scheme administrator and often the payment is only discovered to be unauthorised after the event. They do not, in the most part, result from abuse of the pension tax regime or the exploitation of the tax relief available. Instead, innocent or unavoidable payments, many of a very small amount, can be unauthorised.

As a result of representations made by a number of organisations (including Aries), the situation has improved. Action has been taken by the Government or HMRC on several fronts. In particular, on 8 May 2009 regulations were made* that prescribe as authorised many types of payment that would otherwise be unauthorised.

* The Registered Pension Schemes (Authorised Payments) Regulations 2009 (SI 2009/1171) and referred to in this article as the 2009 Authorised Payments Regs.

This article looks at 13 specific problem areas and provides the up to date position (i.e. has the problem been resolved in whole or in part or is it extant) including the effective date where the 2009 Authorised Payments Regs apply.

Whenever there is an unauthorised payment there is a related issue concerning the potential Scheme Sanction Charge liability which could fall on the scheme administrator. However, that issue is outside the scope of this article as HMRC have conducted a review of the Scheme Sanction Charge process but have not (as at August 2009) published the results of that review.

The Problems Specified

For clarity, the specific problem payments considered in this article are categorised as follows:

1. those that result from inadvertent or unavoidable overpayment of benefits;
2. those that result from the payment of small funds which do not meet the requirements for trivial commutation;
3. those that result from lump sum death benefits paid late;
4. those that result from some other area

Within that main classification, the payments are broken down further and allocated a number. For example:

A1. Overpayments on a pensioner's death
A2. Overpayment of pension in payment
A3. Overpayment of a pension commencement lump sum (PCLS)

Each of the 13 specific problem payments is then considered in some detail under the appropriate heading.