Unauthorised payments from pensions are not something any adviser or client will want to see arising.
The tax penalties can be significant, and an “avoid at all costs” approach will not be too far from best practice.
It can therefore be useful to know the circumstances when charges can arise, so steps can be taken to prevent them.
Most pension schemes will have professional scheme administrators to help keep things on track, but there are exceptions.
Ssas is an obvious example when there is potential for less experienced scheme administrators to be in place – the members themselves – who could inadvertently see unauthorised payments arising.
Even schemes with professional administrators in place may see circumstances when unauthorised payments can arise. Or you may be asked by a client to assist with a transaction which they are unaware is outside of the rules.
What makes a payment unauthorised?
Any payment from a pension that is not an authorised payment is, by definition, an unauthorised payment. Pension legislation sets out the authorised payments, broadly speaking these are:
- member benefits
- death benefits
- recognised transfers
- payments relating to pension sharing orders (on divorce)
- scheme administration payments
- genuine errors
There are also certain payments permitted under specific regulations, such as pension advice allowance payments, small lump sum payments, PPF transfers etc.
In addition, occupational schemes can also make short service refunds and certain authorised employer payments.
When might an unauthorised payment arise?
There are many situations when an unauthorised payment could arise, including circumstances when no actual “payment” has taken place.
The most obvious example of an unauthorised payment would be a member withdrawing money from their pension before age 55 (and where they did not meet the ill health criteria nor had a protected early retirement age).
Similarly, a transfer out that was not a recognised transfer, typically to a registered pension scheme, would cause an unauthorised payment as each is a way for members to liberate their pension.
Other circumstances where unauthorised payments may arise include:
