Pension Transfer and Pension Liberation Tax Charges

Published / Last Updated on 10/04/2024

Under UK pension law, you are allowed to access your pension funds once you reach age 55 (age 57 from 2028).  For some people but not many, you may have a protected retirement age of 50 and even younger but this is normally only available for sports people or those in dangerous occupations.

When the new normal pension age (NPA) of 57 starts in 2028, many will be entitled to a protected retirement age of 55 or 56 from 2028.

That said, there are still some ‘rogue’ firms (usually registered overseas) that market services to access pension funds before age 55 e.g., some form of loan scheme from the pension fund to the member.  This may be because the member is in financial difficulty.  This is known as ‘pension liberation’ and HMRC classes these payments to the pension scheme member as unauthorised payments and tax charges apply usually at 55% but may have more added with charges payable as follows:

Unauthorised Payment and Tax Charges

HMRC Tax Charge Payable

Employer Unauthorised Payment e.g.  from a SSAS to the Employer

Sponsoring Employer must pay 40% of the unauthorised payment.

Pension Scheme Member Unauthorised Payment

Pension Scheme Member must pay 40% of the unauthorised payment.

If more than 25% of the value of the fund is paid out

Employer or Member (depending upon the above) liable to surcharge 15% each.

Pension Scheme Administrator Sanction Charge

Pension Administrator caught for 15% of the unauthorised payment but if the member or employer does to pay their charges in full this could increase to 40%.

Therefore, as a minimum, the tax charge is 55% but it could be 70% or even more.  There are many more due diligence checks in place to prevent pension liberation scams and pension schemes are now much more careful about checking that any outgoing pension transfer is being transferred to an approved HMRC scheme.  This includes pension schemes registered with HMRC in the UK as well as HMRC’s list of Recognised Overseas Pension Schemes (ROPS).

Examples of Unauthorised Payments:

  • Payments to a member before age 55 (57) unless due to ‘serious ill health’ i.e., Less than 12 months life expectancy.
  • Self Invested Pension Plan (SIPP) buying a residential property (i.e., this is not investing in a trade/commercial construction development for gain).
  • Small Self-Administered Scheme (SSAS) buying a boat or yacht.
  • Transferring funds overseas to a non recognised overseas pensions scheme.
  • Loan to a member.
  • Payments to other people whilst the member is alive (except for a Pension Sharing Order on Divorce).

Why is this important to HMRC?

Both pension scheme members and employers’ benefit from tax relief when they pay into pension schemes.  HMRC offers tax relief to incentivise us all to save for retirement and part of HMRC’s duty is to ensure that any tax relief granted is protected and used for what it is intended i.e., your security in retirement.

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