Pensions- Scheme Sanction Charge

6 March 2024

Scheme Sanction Charge

The Scheme Sanction Charge is a charge related to an unauthorised payment. An unauthorised payment happens when a commutation lump sum is above the Pension Commencement Lump Sum (PCLS) threshold. Unauthorised payments have been happening since 2011 when commutation factors rose and the size of the lump sum increased. 

There is a member charge of 40% of the unauthorised payment, and a 15% charge known as scheme sanction charge, which should be paid by the scheme, but some scheme managers have been passing this charge to the member.

As background to this issue- 

• In 2010 the commutation factors changed to above 20, that breached the HMRC maximum limit introducing the unauthorised payment charges, and with them the scheme sanction charge. 
• Neither Home Office or HMRC were able to advise scheme managers on how to treat scheme sanction charges and who should pay these. 
• Scheme managers are responsible for managing, administering and governing the scheme. 
• Scheme managers who took the decision to pass the charge to the member should have an audit as to why the charge would be passed to the member, and their reasoning. 
• Since 2021 when a national pension team was established within NPCC, advice has been given on the matter of the scheme sanction charge. 

The charge should not be passed to the member, because the scheme rules do not allow it. The finance act 2004, says in section 239 paragraph 2 that the person liable to the scheme sanction charge is the scheme administrator. To clarify for the purposes of the term ‘scheme administrator’ they mean the scheme manager - Finance Act 2004 (legislation.gov.uk). Therefore, the person liable is the scheme, and the scheme sanction charge is not chargeable to the member if the pension scheme rules do not allow for it, the 1987 regulations have never been amended to allow the scheme to deduct the tax charge from the member. 

Retired officers who paid tax on their commutation should have received information from the Force. In that information it would state if a Scheme Sanction Charge had been applied.  

If an officer chooses the maximum lump sum commutation from the 1987 pension and has not reached 62 years and 2 months, then there is a tax implication as it breaches scheme rules. The HMRC then levy a Scheme Sanction Charge for the breach of scheme rules.  

Lincolnshire Federation has raised this matter locally with Nick Ward from Finance and we have received assurances that the force has never passed on the Sanction Charge.

Unauthorised Payment Surcharge

This is a tax separate to SCC and is deducted from the lump sum only with the agreement from the individual.

For more information on Pensions or Retirement click links below 

PENSION ADVICE

RETIREMENT