RPSM09100140 - Technical Pages: Member benefits: Overview: Payments: The pension rules and lump sum rule

The pension rules and lump sum rules

Authorised benefit payments

The types of benefit classed as ‘authorised’ payments under the tax legislation for registered pension schemes are broadly as follows

• a tax-free lump sum benefit within certain limits and subject to certain conditions, which is paid in connection with the member first becoming entitled to a relevant pension benefit, (called a pension commencement lump sum - see RPSM09104120),
• a pension benefit providing an income for the life of the member; there are a number of ways a scheme can do this depending on the nature of the scheme concerned, and
• where the individual’s lifetime allowance has been fully used up, any entitlements or uncrystallised funds the member holds in a registered pension scheme may be paid wholly as a taxable lump sum (called a lifetime allowance excess lump sum). The lifetime allowance charge arising on the resulting chargeable amount will be higher where a lifetime allowance excess lump sum is paid (see RPSM09105210).

Other lump sum benefits may be paid in other circumstances specified by the legislation (see below).

Lump sum payments

The restriction on the amount of tax-free pension commencement lump sum a member may draw when they first become entitled to a pension benefit is not measured by reference to an absolute limit based on an individual’s salary or service, but by reference to a percentage or fraction of the capital value of the benefits coming into payment at that time (below the lifetime allowance). See RPSM09104100 to RPSM09104560.

There are also circumstances where pension benefits may be fully commuted and paid wholly as a lump sum (serious ill health, triviality etc). The different types of authorised lump sum payments are dealt with on RPSM09100330 and from RPSM09104000 onwards.

Pension benefits

The different ways a registered pension scheme may provide a member with a pension benefit are detailed on RPSM09100320.