Unauthorsed Payment Charge and Pension Fund Recycling

There is a reduction of the maximum pensions Annual Allowance AA (£60,000 pa contributions) to the Money Purchase Annual Allowance MPAA (£10,000 pa) when you drawdown the taxable part of a pension fund to prevent people recycling pension payments back into new pension contributions to secure yet more tax relief.

There is also another ‘stick’ called Unauthorsed Payment Charges that HMRC uses to stop pension commencement lump sums (PCLS usually tax-free cash in UK but may be taxable if you live overseas) being recycled back into new pension contributions to get even more tax relief on tax free cash.

What Triggers an Unauthorsed Payment Charge?

Having taken (or planning to take your lump sum and either 2 years before (i.e.  you used savings to fund higher pension having pre-planned to take lump sums to replenish savings later) or 2 years after the event seeing a significant increase in pension contributions that are ‘out of the ordinary’.  For example, you take you 25% lump sum form a pension scheme and 6 months later, you increase existing pension contributions from £500pm to £2,000pm or pay a lump sum of £24,000 in may trigger unauthorised payment charge.  The limits are:

• £7,500 increased contributions after 06/04/2015.
• 1% of the old lifetime allowance (LTA) before 06/04/2015.
• 30% or more of your PCLS paid into pensions.

The unauthorised payment charge may not be triggered

• If you have a history of irregular pension payments due to irregular work or income.
• If you have had a significant pay increase or promotion and can afford greater pension contributions.
• You sold other investments and then increased pension contributions.
• You used savings to increase contributions.
• You use salary sacrifice to increase contributions.
• You use redundancy payment sacrifice to increase contributions.
• You increased pension contributions after 06/04/2011 and you are over age 75.

Note:  All of the above rules also apply to increased UK pension contributions if you use overseas pension payments to fund UK contribution increases.

How Much are Unauthorsed Payment Charges?

• Unauthorised Payment Charge – up to 40% of the pension contribution payable by you (or your employer if they mad ethe contribution). 
• Unauthorised Payment Surcharge (if you took more than 25% lump sum) – up to 15 % of the pension contribution payable by you (or your employer if they mad ethe contribution).
• Scheme Sanction Charge – up to 40% of the pension contribution payable by your pension scheme.
• That’s a staggering potential penalty of up to 95% of the unauthorised pension payment.

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