Problems with Protected Pension Ages

I was recently asked a question concerning a scheme that had several members who were entitled to a Protected Pension Age. Some of these members had left service under the scheme and later re-joined the scheme with a new, separate, membership record being created for the second period of service.

A couple of years ago, two of these members applied to take their benefits, to which their Protected Pension Age applied, after their Protected Pension Age but before Normal Minimum Pension Age (NMPA). The benefits in question were taken in the form of Lifetime Annuities, with an associated Pension Commencement Lump Sum being paid too.

My enquirer asked whether this will cause any problems, given that the benefits for the second period of service have not been taken.

Unfortunately, I had to confirm to my enquirer that there will indeed be issues here. This is because one of the conditions for taking benefits with a Protected Pension Age of below 55 is that, broadly speaking, the member must become entitled to all benefits under the scheme (which were not already in payment before 6 April 2006) on the same date.

As the members concerned did not become entitled to all of their benefits under the scheme on the same date, the conditions for a Protected Pension Age were not met. As such, assuming that the members did not meet the ill health condition, all payments made to the members before they reach NMPA will be unauthorised payments. To be clear here, the PCLS paid will be unauthorised, as will each instalment of the Lifetime Annuity paid out before the member in question reaches NMPA.

The members will be subject to an Unauthorised payment Charge on each unauthorised payment made. In addition, it is likely that they will be liable for an Unauthorised Payment Surcharge during the first year (assuming that the combined total of the “PCLS” paid plus the unauthorised annuity instalments reaches or exceeds the 25% surcharge threshold). In addition, the scheme will be liable for a Scheme Sanction Charge in respect of each unauthorised payment.

There are also a number of “corrective” actions that will be required here. Firstly, the taking of the benefits as an unauthorised payment does not represent a Benefit Crystallisation Event (BCE), so the members’ records will need to be amended accordingly. This could also have a knock-on effect for any schemes under which the members have taken benefits after taking the benefits under this scheme (any other schemes may have to revisit their Lifetime Allowance tests).

At this point, it is worth noting that a BCE will occur for these members when they reach NMPA. Unusually here, although the benefits in question were secured via a Lifetime Annuity, when the members reach NMPA, this will trigger a BCE 2 (Scheme Pension) rather than a BCE 4 (Lifetime Annuity), with the amount crystallising being based on the annual rate of the annuity due to the member when they reach NMPA.

In addition, there will need to be adjustments made to the income tax position. The annuity provider will have taxed the annuity instalments as pension income in the usual way. Where an unauthorised payment is involved, however, this is subject to the Unauthorised Payment Charge but not to a further charge to income tax. As such, any income tax deducted should indeed be reclaimed from HMRC, which will involve revisiting the Payroll records and the Real Time Information submissions to HMRC.

Next, the scheme (and the annuity provider) will need to revisit the Event Report(s) submitted for the Tax Year in which any unauthorised payments have been made, as the making of an unauthorised payment is a reportable event. In addition, unless the scheme itself is covering the members’ unauthorised payment charges, the members will need to report the unauthorised payments to HMRC, usually via? their Self-Assessment Tax Return (which may require them to submit amended Tax Returns for one or more Tax Years). If the scheme is going to settle all of the unauthorised payment charges on the members’ behalf, then it is likely that the charges settled by the scheme will themselves be unauthorised payments, leading to more complications (as “grossing up” is likely to be required).

Finally, HMRC can impose interest charges and late payment penalties where an Unauthorised Payment Charge is not settled on time, as well as imposing a penalty on the scheme for submitting incorrect Event Reports.

Overall, then, there will be quite a lot of extra work needed (and the associated costs to be considered) to rectify these cases. These cases are a salutary reminder of ensuring that all relevant HMRC requirements are met when benefits are to be settled.

Aries Insight?provides comprehensive and detailed guidance on the application of Protected Pension Ages, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.? If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.