Unauthorised charges
Unauthorised payment charges can occur in several scenarios and they should be avoided if possible. Having an unauthorised payment charge essentially means that the rules surrounding pension schemes have been broken and funds have been accessed in a way that isn’t permitted.
If enough unauthorised payments occur in a scheme, the scheme can be deregistered and additional tax charges will apply to the remainder of the assets in the plan. This is rare, but it is something to be aware of for schemes that are not managed by a professional administrator. Most mainstream plans wouldn’t have this issue.
Unauthorised payments generally fall into two categories – member and employer – but the charges are more or less the same.
There is an initial unauthorised payment charge equating to 40 per cent of the unauthorised payment. There is also a scheme sanction charge that would be levied on the scheme; this is also 40 per cent of the unauthorised payment.
However, the scheme sanction charge will be reduced to just 15 per cent if the unauthorised payment charge is paid in full. If only part of the unauthorised payment charge is made, the reduction in the scheme sanction charge will reflect this.
The unauthorised payment charge will fall on the person or entity to have received the unauthorised payment, rather than being taken from the scheme. However, the scheme sanction charge will be paid from the scheme itself.
On top of all these charges there is a possibility of an unauthorised payment surcharge, which only applies if the unauthorised payments exceed 25 per cent of the member’s fund (25 per cent of the scheme for employer payments) within a 12-month period. This means that multiple small unauthorised payments could suddenly result in a large extra charge. Again this charge will fall on the person or entity that has received the payments.
In total, these charges will be 70 per cent of the amount of the unauthorised payment if they all apply in full. This is a real deterrent for anyone wanting to try and bypass pensions rules and access funds before the age of 55.
These charges can also apply to investments made by the scheme, such as a loan to a sponsoring employer that doesn’t meet all the rules for a loan back or isn’t paid back in the correct timescale.
For those that fall foul of scams, these charges could be levied on the individual because they have, in theory, received the payments out of the scheme – despite the reality being they have lost the funds to a scam. This creates a particular problem because the very fact they have lost their pension access may well mean they do not have the funds to pay the charges to HM Revenue & Customs.
