Finance Bill

House of Commons

Session 2002 - 03
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Part 4 — Pension schemes etc
Chapter 5 — Registered pension schemes: tax charges
178

205
Unauthorised payments surcharge
(1)
A charge to income tax, to be known as the unauthorised payments surcharge,
arises where a surchargeable unauthorised payment is made by a registered
pension scheme.
(2)
“Surchargeable unauthorised payments” means—
5
(a)
surchargeable unauthorised member payments (see section 206), and
(b)
surchargeable unauthorised employer payments (see section 209).
(3)
The person liable to the charge—
(a)
in the case of a surchargeable unauthorised member payment made
before the member’s death, is the member in respect of whose
10
arrangement the payment was made,
(b)
in the case of a surchargeable unauthorised member payment made
after the member’s death, is the recipient, and
(c)
in the case of a surchargeable unauthorised employer payment, is the
sponsoring employer to or in respect of whom the payment was made.
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(4)
If more than one person is liable to the unauthorised payments surcharge in
respect of a surchargeable unauthorised payment, those persons are jointly
and severally liable to the surcharge in respect of the payment.
(5)
A person is liable to the unauthorised payments surcharge whether or not—
(a)
that person,
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(b)
any other person who is liable to the unauthorised payments
surcharge, and
(c)
the scheme administrator,

are resident, ordinarily resident or domiciled in the United Kingdom.
(6)
The rate of the charge is 15% in respect of the surchargeable unauthorised
25
payment.
(7)
The Treasury may by order increase or decrease the rate for the time being
specified in subsection (6).
206
Surchargeable unauthorised member payments
(1)
This section identifies which unauthorised member payments made by a
30
registered pension scheme in respect of an arrangement relating to a member
under the pension scheme are surchargeable.
(2)
If the surcharge threshold is reached before the end of the period of 12 months
beginning with a reference date, each unauthorised member payment made in
respect of the arrangement in the surcharge period is surchargeable.
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(3)
The surcharge period is the period—
(a)
beginning with the reference date, and
(b)
ending with the day on which the surcharge threshold is reached.
(4)
The first reference date is the date on which the pension scheme first makes an
unauthorised member payment in respect of the arrangement.
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(5)
Each subsequent reference date is the date, after the end of the previous
reference period, on which the pension scheme next makes an unauthorised
member payment in respect of the arrangement.

Finance Bill
Part 4 — Pension schemes etc
Chapter 5 — Registered pension schemes: tax charges
179

(6)
The previous reference period is the period of 12 months beginning with the
previous reference date or, if the surcharge threshold is reached in that period,
is the surcharge period ending with the date on which it was reached.
(7)
The surcharge threshold is reached if the unauthorised payments percentage
reaches 25%.
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(8)
The unauthorised payments percentage is the aggregate of the percentages of
the pension fund used up by each unauthorised member payment made by the
pension scheme in respect of the arrangement on or after the reference date.
(9)
The percentage of the pension fund used up on the occasion of an unauthorised
member payment is—
10

where—

UMP is the amount of the unauthorised member payment, and

VR is an amount equal to the value of the member’s rights under the
arrangement when the unauthorised payment is made (or, if the
unauthorised payment is made after the member’s death, at the date of
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the member’s death).
(10)
The value of the member’s rights under the arrangement on that date is the
aggregate of—
(a)
the value of the member’s crystallised rights under the arrangement on
that date, calculated in accordance with section 207, and
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(b)
the value of the member’s uncrystallised rights under the arrangement
on that date, calculated in accordance with section 208.
207
Valuation of crystallised rights for purposes of section 206
(1)
The value of the member’s crystallised rights under the arrangement on any
date is the aggregate of—
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(a)
the value of each scheme pension or lifetime annuity to which the
member has an actual (rather than a prospective) entitlement under the
arrangement on that date, and
(b)
the aggregate of the amount of the sums, and the market value of the
assets, representing the member’s unsecured pension fund or
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alternatively secured pension fund in respect of the arrangement on
that date (if any).
(2)
The value of a scheme pension or lifetime annuity is—

where—

RVF is the relevant valuation factor (see section 270), and
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ARP is an amount equal to the annual rate of the pension or annuity on
the date.
208
Valuation of uncrystallised rights for purposes of section 206
(1)
Rights are uncrystallised if the member is not entitled to the present payment
of benefits in respect of the rights.
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Finance Bill
Part 4 — Pension schemes etc
Chapter 5 — Registered pension schemes: tax charges
180

(2)
The member is to be treated as entitled to the present payment of benefits in
respect of the sums and assets representing the member’s unsecured pension
fund or alternatively secured pension fund.
(3)
The value of the member’s uncrystallised rights under the arrangement on any
date is to be calculated—
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(a)
in accordance with subsection (4) if the arrangement is a cash balance
arrangement,
(b)
in accordance with subsection (5) if the arrangement is a money
purchase arrangement other than a cash balance arrangement,
(c)
in accordance with subsection (6) if the arrangement is a defined
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benefits arrangement, and
(d)
in accordance with subsection (7) if the arrangement is a hybrid
arrangement.
(4)
If this subsection applies, the value of the member’s uncrystallised rights
under the arrangement on the date is the amount which would, on the
15
valuation assumptions (see section 271), be available for the provision of
benefits in respect of those rights if the member became entitled to benefits in
respect of those rights on the date.
(5)
If this subsection applies, the value of the member’s uncrystallised rights
under the arrangement on the date is the aggregate of—
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(a)
the amount of such of the sums held for the purposes of the
arrangement on the date as represent those rights, and
(b)
the market value of such of the assets held for the purposes of the
arrangement on the date as represent those rights.
(6)
If this subsection applies, the value of the member’s uncrystallised rights
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under the arrangement on the date is—

where—

RVF is the relevant valuation factor (see section 270),

ARP is the annual rate of pension to which the member would, on the
valuation assumptions, be entitled under the arrangement on the date
30
if, on the date, the member acquired an actual (rather than a
prospective) right to receive a pension in respect of the rights, and

LS is the amount of any lump sum to which the member would, on the
valuation assumptions, be entitled under the arrangement on the date
(otherwise than by way of commutation of pension) if, on the date, the
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member acquired an actual (rather than a prospective) right to payment
of a lump sum in respect of the rights.
(7)
If this subsection applies, the value of the member’s uncrystallised rights
under the arrangement on the date is—
(a)
if each of subsections (4), (5) and (6) is relevant, the greatest of the
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values of the rights calculated in accordance with each of those
subsections, or
(b)
if only two of those subsections are relevant, the greater of the values of
the rights calculated in accordance with each of the two subsections.
(8)
Subsection (4) is relevant if, in any circumstances, cash balance benefits may be
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provided to or in respect of the member under the arrangement.

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Part 4 — Pension schemes etc
Chapter 5 — Registered pension schemes: tax charges
181

(9)
Subsection (5) is relevant if, in any circumstances, money purchase benefits
other than cash balance benefits may be provided to or in respect of the
member under the arrangement.
(10)
Subsection (6) is relevant if, in any circumstances, defined benefits may be
provided to or in respect of the member under the arrangement.
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209
Surchargeable unauthorised employer payments
(1)
This section identifies which unauthorised employer payments made by a
registered pension scheme to or in respect of a sponsoring employer are
surchargeable.
(2)
If the surcharge threshold is reached before the end of the period of 12 months
10
beginning with a reference date, each unauthorised employer payment made
to or in respect of the employer in the surcharge period is surchargeable.
(3)
The surcharge period is the period—
(a)
beginning with the reference date, and
(b)
ending with the day on which the surcharge threshold is reached.
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(4)
The first reference date is the date on which the pension scheme first makes an
unauthorised employer payment to or in respect of the employer.
(5)
Each subsequent reference date is the date, after the end of the previous
reference period, on which the pension scheme next makes an unauthorised
employer payment to or in respect of the employer.
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(6)
The previous reference period is the period of 12 months beginning with the
previous reference date or, if the surcharge threshold is reached in that period,
is the surcharge period ending with the date on which it was reached.
(7)
The surcharge threshold is reached if the unauthorised payments percentage
reaches 25%.
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(8)
The unauthorised payments percentage is the aggregate of the percentages of
the pension fund used up by each unauthorised employer payment made by
the pension scheme to or in respect of the employer on or after the reference
date.
(9)
The percentage of the pension fund used up on the occasion of an unauthorised
30
employer payment is—

where—

UEP is the amount of the unauthorised employer payment, and

AA is an amount equal to the aggregate of the amount of the sums and the
market value of the assets held for the purposes of the pension scheme
35
at the time when the unauthorised employer payment is made.
Lifetime allowance charge
210
Lifetime allowance charge
(1)
A charge to income tax, to be known as the lifetime allowance charge, arises
where—
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Finance Bill
Part 4 — Pension schemes etc
Chapter 5 — Registered pension schemes: tax charges
182

(a)
a benefit crystallisation event occurs in relation to an individual who is
a member of one or more registered pension schemes, and
(b)
either the first lifetime allowance charge condition or the second
lifetime allowance charge condition is met.
(2)
The first lifetime allowance charge condition is that—
5
(a)
the whole or any part of the individual’s lifetime allowance is available
on the benefit crystallisation event, but
(b)
the amount crystallised by the benefit crystallisation event exceeds the
amount of the individual’s lifetime allowance which is available on the
benefit crystallisation event.
10
(3)
The second lifetime allowance charge condition is that none of the individual’s
lifetime allowance is available on the benefit crystallisation event.
(4)
The following sections make further provision about the lifetime allowance
charge—

section 211 (amount of charge),
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section 212 and Schedule 32 (benefit crystallisation events and amounts
crystallised),

section 213 (persons liable to charge),

section 214 (individual’s lifetime allowance and standard lifetime
allowance),
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section 215 (availability of individual’s lifetime allowance), and

sections 216 to 222 (lifetime allowance enhancement factors).
(5)
In sections 211 to 215—
(a)
references to “the individual”, in relation to the lifetime allowance
charge, are to the individual in relation to whom the benefit
25
crystallisation event giving rise to the charge occurs, and
(b)
references to “the pension scheme”, in relation to the lifetime allowance
charge, are to the pension scheme to which the benefit crystallisation
event giving rise to the charge, or the amount crystallised by it, relates.
(6)
Schedule 34 contains (in Part 2) transitional provision about the lifetime
30
allowance charge.
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Amount of charge
(1)
The lifetime allowance charge is a charge in respect of the chargeable amount.
(2)
The lifetime allowance charge is a charge—
(a)
at the rate of 55% in respect of so much (if any) of the chargeable
35
amount as constitutes the lump-sum amount, and
(b)
at the rate of 25% in respect of so much (if any) of the chargeable
amount as constitutes the retained amount.
(3)
The “chargeable amount” is the aggregate of—
(a)
the basic amount, and
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(b)
any amount which is treated as forming part of the lump-sum amount
under subsection (6) or of the retained amount under subsection (8).
(4)
The “basic amount”—

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Part 4 — Pension schemes etc
Chapter 5 — Registered pension schemes: tax charges
183

(a)
if the first lifetime allowance condition is met, is the amount by which
the amount crystallised by the benefit crystallisation event exceeds the
amount of the individual’s lifetime allowance available on it, and
(b)
if the second lifetime allowance charge condition is met, is the amount
crystallised by the benefit crystallisation event.
5
(5)
The “lump-sum amount” is the aggregate of—
(a)
so much of the basic amount as is paid as a lump sum to the individual
or a lump sum death benefit in respect of the individual, and
(b)
any amount which is treated as forming part of the lump-sum amount
under subsection (6).
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(6)
If and to the extent that the tax payable under this section on any of the lump-
sum amount is covered by a scheme-funded tax payment, it is to be treated as
itself forming part of the lump-sum amount.
(7)
The “retained amount” is the aggregate of—
(a)
so much of the basic amount as is not paid as a lump sum to the
15
individual or a lump sum death benefit in respect of the individual, and
(b)
any amount which is treated as forming part of the retained amount
under subsection (8).
(8)
If and to the extent that the tax payable under this section on any of the retained
amount is covered by a scheme-funded tax payment, it is to be treated as itself
20
forming part of the retained amount.
(9)
An amount of tax payable under this section is “covered by a scheme-funded
tax payment” if—
(a)
the tax is paid by the scheme administrator, and
(b)
the individual’s rights under the pension scheme are not reduced so as
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fully to reflect the amount of the payment of tax.
(10)
Whether the individual’s rights under the pension scheme are reduced so as
fully to reflect the amount of the payment of tax is to be determined in
accordance with normal actuarial practice.
(11)
The chargeable amount is not to be treated as income for any purpose of the
30
Tax Acts.
212
Benefit crystallisation events and amounts crystallised
(1)
This table sets out—
(a)
the events which are benefit crystallisation events in relation to the
individual, and
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(b)
the amount which is crystallised by each of those events.

Finance Bill
Part 4 — Pension schemes etc
Chapter 5 — Registered pension schemes: tax charges
184

BENEFIT CRYSTALLISATION
AMOUNT CRYSTALLISED

EVENTS

1. The designation of sums or assets
The aggregate of the amount of the

held for the purposes of a money
sums and the market value of the

purchase arrangement under any of
assets designated

5

the relevant pension schemes as

available for the payment of

unsecured pension to the individual

2. The individual becoming entitled

to a scheme pension under any of

10

the relevant pension schemes

3. The individual, having become so

entitled, becoming entitled to

payment of the scheme pension,

otherwise than in excepted

15

circumstances, at an annual rate

which exceeds the rate at which it

was last paid by more than the

permitted margin

4. The individual becoming entitled
The aggregate of the amount of such

20

to a lifetime annuity purchased
of the sums, and the market value of

under a money purchase
such of the assets, representing the

arrangement under any of the
individual’s rights under the

relevant pension schemes
arrangement as are applied to

purchase the lifetime annuity

25

5. The individual reaching the age of

75 when prospectively entitled to a

scheme pension or a lump sum (or

both) under a defined benefits

arrangement under any of the

30

relevant pension schemes

6. The individual becoming entitled
The amount of the lump sum

to a relevant lump sum under any of

the relevant pension schemes

7. A person being paid a relevant
The amount of the lump sum death

35

lump sum death benefit in respect of
benefit

the individual under any of the

relevant pension schemes

8. The transfer of sums or assets held
The aggregate of the amount of any

for the purposes of, or representing
sums transferred and the market

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accrued rights under, any of the
value of any assets transferred

relevant pension schemes so as to

become held for the purposes of or

to represent rights under a

recognised overseas pension scheme

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in connection with the individual’s

membership of that pension scheme