Unauthorised payments have become an enormous problem for UK pension administrators and there is widespread frustration in the industry. People are concerned with both the scale and diversity of unauthorised payments being generated, also the problems of the interaction with the Scheme Sanction Charge. HMRC has been well aware of this for at least the past 8 months, and has an internal review under way.

A significant proportion of these unauthorised payments are not intentional on the part of either the member or the employer. Often the payment is only discovered to be unauthorised after the event. Whereas the original intention of the legislation might have been to make deliberate misuse of pension assets unattractive by punitive taxation of such activity, the effect in practice has been to catch a great number of innocent or unavoidable payments - many of a very small amount. There is growing evidence that the impact of the legislation is not proportionate to the risk at which it was targeted.

In some cases, we understand, scheme rules prohibit the making of unauthorised payments. This is true of at least one life office's schemes. Many other providers, although capable of processing them correctly, would prefer to avoid being perceived as companies that allow unauthorised payments.

The most serious administrative burdens arise from

1. inadvertent or unavoidable overpayment of benefits; and
2. payment of small funds which do not meet the requirements for trivial commutation.

We suggest HMRC needs to work with the industry to find ways of placing the major proportion of such payments outside the scope of taxation as unauthorised payments, eg perhaps by

1. the use of practical de minimis limits;
2. treating them instead as scheme administration member payments eg via regulations under s.171(5);
3. bringing them within the scope of the authorised payments rules via regulations under FA 2004 s.164(f);
4. a declaration by HMRC that it will not seek to collect the tax which is strictly due'; or
5. some combination of the above.

We have drawn on industry experience to produce a detailed analysis of the situations giving rise to this problem and the practical solutions which could be adopted. Main sections of the report are as follows:

1. Overpayments on a pensioner's death
2. Overpayment of pension in payment
3. Overpayment of PCLS
4. LSDBs paid more than two years after administrator was told of member's death
5. Benefits paid incorrectly under the triviality rules
6. Small funds generally
7. Small restitution payments to correct errors after benefit payment
8. Receipt of additional funds from investment managers post annuity purchase.
9. Dependant pension errors
10. Pension increase errors
11. Overseas transfers to Australia: interaction of UK and Australian tax law
12. Larger errors by the scheme administrator
13. SIPP & property problems
14. 'Surplus' from pre-A Day restricted annuities
15. Criminal activity

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