RPSM09105210 - Technical Pages: Member benefits: Lump sums: Lifetime allowance excess lump sum

Payment of a lifetime allowance excess lump sum

Where a member uses up 100% of their lifetime allowance, any amount that crystallises for lifetime allowance purposes above that allowance represents a chargeable amount. This chargeable amount will give rise to a lifetime allowance charge.

Once the member has used up all their available lifetime allowance the legislation permits a scheme to pay out all their remaining entitlements under an arrangement as a lump sum payment (a lifetime allowance excess lump sum). A scheme is allowed to pay out all (or part) of any funds held in the arrangement, or commute all (or part) of any pension entitlements that are going to arise under that arrangement, as a lump sum payment to the member.

A registered pension scheme is not obliged to offer this option to its members. Whether or not a scheme offers the lifetime allowance excess lump sum option, or indeed insists upon it in certain circumstances, will depend on the scheme rules.

So a lifetime allowance excess lump sum is a lump sum that

• is paid when the member has no available lifetime allowance (so is paid entirely from a chargeable amount),
• is not a short service refund lump sum or a refund of excess contributions lump sum (or, if paid in the 2006/07 tax year by a former approved superannuation fund, a winding-up lump sum), as all these lump sum payments can be paid where there is no available lifetime allowance, and their payment is not caught for lifetime allowance purposes through BCE 6,
• does not reduce the rate of payment of any pension to which the member has already become (actually) entitled, or extinguish the member’s entitlement to payment of such pension (so this means any pension in payment already under the scheme). But this requirement does not prevent an uncrystallised pension entitlement coming into payment at the same time from being reduced; and indeed this will normally occur under a defined benefits arrangement for the chargeable amount to be wholly paid as a lifetime allowance excess lump sum,
• it is paid when the member has reached normal minimum pension age (or earlier where the ill-health condition is met)(NB This must always be the case, as the only time a BCE for lifetime allowance purposes can arise earlier than this is where a transfer overseas occurs, and here no lump sum is paid ), and
• it is paid before the member reaches the age of 75.

RPSM11105050 to RPSM11105320 explain how the level of lifetime allowance excess lump sum paid is calculated and goes into more detail on the lifetime allowance charge liability. RPSM11105070 gives an example showing how this all works where only some of the benefits or amounts crystallising fall as a chargeable amount.