RPSM09105450 - Technical Pages: Member benefits: Lump sums: Other small lump sum payments: Payments relating to members who were untraceable at age 75

This guidance only covers the position where the member became entitled to a pension commencement lump sum before 6 April 2011. If the member reached age 75 between 22 June 2010 and 5 April 2011 you should also read the guidance in RPSM17100000 onwards.

If the entitlement arose on or after 6 April 2011 you should first read the guidance at RPSM09104195 & RPSM09104900 respectively.

Payments relating to members who were untraceable at age 75

The tax rules for registered pension schemes do not set a maximum age by which benefits must be taken in all cases. However the tax legislation is designed to encourage pensions to start no later than the member’s 75^th birthday. For example, from the age of 75, there are stricter rules on pension income from money purchase arrangements. And one of the conditions for a pension commencement lump sum is very broadly that any pension to which the lump sum is related, began before the member reached age 75 (see RPSM09104130). Furthermore, any benefits which have not been crystallised by the member’s 75th birthday (including rights under defined benefit arrangements), must be tested against the lifetime allowance at that time (this is the case whether they are actually paid or not).

All of this means that schemes will generally try and agree details with the member, and take any appropriate steps, before the member’s 75^th birthday. However, real life cases occur where members cannot be traced in time. Their benefit rights are still due under the scheme, but the tax legislation may have closed certain authorised payment options from the age of 75.

It has already been mentioned above how the opportunity to take a pension commencement lump sum closes off. The normal solution in such a case is to pay out any remaining rights as pension. However, where the value of those rights is relatively small, providing a pension can prove uneconomical. Ordinarily, where the value is too small to provide a pension, the member might ask for a trivial commutation lump sum to be paid out. However, one of the conditions for such a lump sum is that it is paid before the age of 75, so people traced at a later age can’t take advantage of this option.

The tax rules therefore allow a further limited option. This is to permit a small lump sum to be paid as an authorised member payment, providing certain conditions are met.

The conditions are:

• the scheme administrator had been unable to trace the member at the time the member reached age 75, and
• the scheme administrator had taken reasonable steps to try to locate the member, and
• the scheme administrator had not received any communication from the member in the 5 years before the date on which the administrator:
• discovered the member’s whereabouts, or
• if the member had died, learned of the death of the member,
• the payment is made between the 1^st December 2009 and the later of:
• 12 months after the date on which the scheme administrator had discovered the member’s whereabouts or learned of their death, as the case may be, or
• 1^st June 2010
• the payment does not exceed £2,000, and
• the payment either:
• extinguishes the member’s entitlement to benefits under the registered pension scheme, or
• if made after the member’s death, the payment represents the total value of all sums and assets held for the purposes of the scheme in respect of the member.

It may be worth paying particular attention to the time window above, which can be easily missed after a death has been notified, if the administrator does not decide on a beneficiary for the small lump sum within the available time window.