Pension benefits from a defined benefit pension scheme

Introduction

The purpose of a registered pension scheme is to provide retirement and death benefits for its members, and the financial dependants of members. The UK pensions taxation system is predicated upon tax privileges through relief on contributions when made, a tax privileged pension fund which grows largely free of taxation and benefits on retirement which are subject to taxation with the exception of the pension commencement lump sum (PCLS) which is (currently) free from UK tax.

Authorised and unauthorised benefits from registered pension schemes

A registered pension scheme is authorised to pay out benefits to or in respect of a member in two forms, as a pension or as a lump sum (or both). The legislation lists all the authorised forms of pensions and lump sum payments and the circumstances in which they can be paid, and sets out the conditions and restrictions that these payments must meet or follow in order for them to be authorised.

Authorised payments from a registered pension scheme are pension benefits that comply with the pension rules in FA 2004, s 165 and lump sum payments that comply with the lump sum rules in FA 2004, s 166.

If a pension benefit or a lump sum payment does not comply with these rules, it is an ‘unauthorised member payment’ and is taxable. Unauthorised member payments give rise to a tax charge of up to 55% of the unauthorised payment and, in addition, a scheme sanction charge is payable by the administrator of the pension scheme that has granted the unauthorised member payment. This charge is 15% of the payment made or deemed to have been made.

Authorised member payments are frequently chargeable to tax on the recipient.

Pension and lump sum payments

As set out above, the two forms of authorised member payments are:

1. •

   pensions permitted by the pension rules or pension death benefit rules

2. •

   lump sums permitted by the lump sum rule or lump sum death