Tax treatment of payments from a pension scheme in the hands of the member

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Tax treatment of payments from a pension scheme in the hands of the member
  • Introduction
  • Pension payments
  • Lump sum rules
  • Taxation of pension payments
  • Taxation of lump sum payments

Introduction

The purpose of this note is to consider the tax treatment in the hands of the member of the various authorised payments that are permitted from a registered pension scheme. It covers various lump sums, as well as regular payments, and looks at the tax treatment, including whether PAYE has to be applied.

Many of these payments are considered in other notes, but not all of them as some are encountered relatively rarely in practice.

What follows is a full list of authorised lump sum and income payments (the pension rules and the lump sum rules) followed by an outline of the applicable tax treatment.

Pension payments

The following pension rules are in FA 2004, s 165 (with further explanation in FA 2004, s 28):

Pension rule 1

“No payment of pension may be made before the day on which the member reaches normal minimum pension age, unless the ill-health condition was met immediately before the member became entitled to a pension under the pension scheme.”

Normal minimum pension age was 50 until 5 April 2010, and 55 thereafter. There are earlier than normal permitted minimum pension ages for those in occupations that traditionally retire earlier, such as members of the armed forces, the police or fire services, or models, dancers and sports people, as set out in SI 2005/3451 (subscription sensitive).

Pension rule 2

“If the member dies before the end of the period of 10 years beginning with the day on which the member became entitled to a scheme pension or an annuity, and if in the case of an annuity that day was before 6 April 2015, payment of the scheme pension or annuity may continue to be made (to any person) until the end of that period.

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