The Registered Pension Schemes (Authorised Payments) Regulations have, at last, been laid before Parliament. These regulations are designed to help schemes deal with a few of the practical problems they have been having with the unauthorised payments regime that took effect from 6 April 2006 ("A-Day"). The Regulations have been a long time in coming: the changes were originally flagged in the Budget back in March 2008, with draft Regulations being issued by HMRC as long ago as last June (see our LawNow Authorised payments - update)

Overpayments

From A-Day, any payment made by a registered pension scheme to a member which is not expressly authorised by the Act is treated as unauthorised and subject to significant tax charges (attracting an initial charge to tax of 40%, as well as other potential charges). HMRC had published guidance to give limited relief in relation to "genuine errors", but this only applied to sums up to £250. Otherwise, there was no discretion for a mistaken payment to be treated in the same way as other payments of pension or lump sum.

Where, as is not uncommon, pension has initially been paid at too high a rate and then corrected to its initial level, the strict position was that any part of the original overpayment that was not recouped would be treated as unauthorised. This was the case even if trustees were not able to recover the overpayment (or had properly decided not to do so).

The Regulations finally change this position, with retrospective effect to A-Day, to allow overpayments of pension paid in error to be treated as authorised where the scheme administrator believed that the recipient was entitled to the payment. This provides more comfort than the draft Regulations, which had risked undermining the policy intention by suggesting that the error might have to meet a "reasonableness" test. Some payments made even after discovery of the error may also be treated as authorised, so long as reasonable steps were taken to try and prevent payment.

In addition, the Regulations introduce a specific power to recover overpayments of pension commencement lump sums made in error. This is a sensible and welcome clarification.

Trivial commutation

The A-Day trivial commutation requirement is that benefits under all schemes must be taken into account. This left many members with one or more small, so-called "stranded" pension pots unable to take trivial commutation because the total value of rights in their schemes was above the global trivial commutation limit, currently £17,500.

The Regulations therefore introduce, although only from 1 December 2009, an additional facility to allow stranded pots with a value of up to £2,000 to be paid to members. However, it is a condition of payment that the total value of benefits under all schemes relating to the same employment does not exceed £2,000. In addition, no payment can be made where the member has taken a transfer from any such scheme in the previous 3 years.

A new feature of the final Regulations is that they also introduce a commutation easement for payments in certain circumstances by "larger schemes", defined as occupational pension schemes (or public service schemes) with at least 50 members. The aim of this is to allow payments of up to £2,000, again which must extinguish the member's entitlement, but here there is no requirement that the total value of benefits under all related schemes is £2,000 or less.

Other relaxations

The Regulations also introduce a number of further easements, many of which were also in the draft Regulations last summer.

These include provisions dealing with certain other de minimis payments, payments of arrears of pension where the member's entitlement was only established after the member's death, inadvertent payment of pension commencement lump sums after death and continued (but inadvertent) payment of pension instalments after death for up to six months, so long as the administrator did not know, or could not reasonably have been expected to know, of the death.

In summary...

In all, the Regulations should be welcomed by trustees, employers and administrators alike, although it is hard to escape the feeling that it should not have taken more than three years from A-Day for them to have been produced. To view the Regulations please click here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 12/05/2009.