RPSM09105430 - Technical Pages: Member benefits: Lump sums: Other small lump sum payments: Small lump sum payments made after purchase of scheme pension or lifetime annuity

Small lump sum payments made after purchase of scheme pension or lifetime annuity

There are a number of ways in which a registered pension scheme could have ‘secured’ a pension with an insurance company:

• One way would be to have purchased a scheme pension payable by an insurer chosen by the scheme administrator (see RPSM09101205).
• Another way would be to have purchased a lifetime annuity (see RPSM09101700) from an insurance company chosen by the member.
• Yet another possibility is that an insured annuity was purchased before 6 April 2006 and continues in payment now that the scheme is a registered pension scheme.

Page RPSM09101020 provides more detail about how to secure a pension.

Securing all of a member’s rights in one of the ways bulleted above, will usually end that scheme’s day to day involvement with the member. However, there are exceptions, and sometimes these are unexpected. It may happen for example, that a further payment is made into the scheme at a later date; a payment which still relates to the member whose benefit rights had previously been fully secured with an insurer. An example of this would be where dividends or other structured payments, are received from an investment that had related to the member. Late payments might also be received from an insurance company, say, in the case of unit pricing problems relating to a policy investment under the scheme, or from a fund manager. More simply perhaps, the receipt of a payment may have been overlooked. No doubt other scenarios, where late payments are made into a member’s arrangement,are possible.

A scheme might also find that it holds extra rights for the member without there actually being a payment-in. There could simply be some rights that, for whatever reason, had not been correctly identified at the time the member’s rights were secured with the insurer. An example might be where there had been a valuation error in a money purchase arrangement, which had caused an investment that provided part of the value used to secure benefit rights with the insurer, to be undervalued. A later correction in the valuation could result in there being further rights in the scheme relating to the member whose benefits had previously been secured with the insurer. Another example might be where some remaining age-related contracting out rebates may be due to be paid into the scheme by HM Revenue and Customs but it was considered expedient to purchase an annuity ahead of their receipt, perhaps because of favourable prevailing annuity rates.

Many of the above kinds of situation, which cause there to be further member rights under an arrangement in the scheme, will be classed under the tax rules as a ‘relevant accretion’. The scheme in turn, is likely to have to pay out those rights. However, where the value of the rights is small, schemes may face practical difficulties making payments that would be authorised under the tax rules. The value may be too small to buy a lifetime annuity or fund a scheme pension. Problematic scenarios could also arise in some cases where the member has died by the time the further rights are identified.

Where a scheme holds such further small value rights, the tax rules provide a possible solution: the scheme may pay a one-off small lump sum to the member (or in respect of the member, if the member has since died). Such a ‘small lump sum’ will be an authorised member payment providing the following conditions are met (subject to the proviso at the end). The conditions are:

• a pension has been purchased for the member by the scheme, with an insurance company in one of the ways bulleted at the top of this page, and
• if that pension was purchased on or after 6^t h April 2006, then all or part of the member’s lifetime allowance must have been available at the time of the purchase, and
• after that pension was purchased, there was a ‘relevant accretion’ in the scheme for the member (whether still living or dead), meaning:

• • a payment is made into the scheme in respect of the member for whom the pension was purchased (this will typically apply to money purchase benefit rights), and / or
  • there is a further allocation of value to the “member’s arrangement” above the value which the administrator had expected the sums and assets held for the purposes of that arrangement to be worth when the pension was purchased - as might occur for example, with a corrective revaluation of sums and assets (again, this will typically apply to money purchase benefit rights), and / or
  • the scheme administrator becomes aware for the first time, of the member’s entitlement to a further benefit, in circumstances where they could not reasonably have been expected to be aware of it at the time of the pension was purchased - for example following a court judgment relating to a defined benefits arrangement, or as might occur when implementing revised legal conclusions on the application of overriding sex equalisation legislation where the retrospective effect may lead to small additions to original benefit entitlements,

• and a payment is then made from the scheme to the member (or in respect of the member if that person has since died) (the payment out), and
• the payment extinguishes the member’s entitlement to benefits under the scheme, and
• the payment does not exceed £2,000 - and
• the payment does not exceed the value of the ‘relevant accretion’’, where the value is:

• • the amount of the payment in, or
  • the amount of the increase in the value of the of the sums and assets held for the purposes of the arrangement receiving the further allocation of value, or
  • the value of the further benefit to which the administrator becomes aware the member is entitled,

• the payment is made between the 1^s t December 2009 and the later of:

• • 1^s t June 2010, and
  • 6 months after the ’relevant accretion’ occurred.

However, the payment made in these circumstances will be an authorised member payment only on the proviso that the ’relevant accretion’, was:

• not a contribution into the scheme (other than a contribution made by HM Revenue and Customs that was made under section 42A(3) or 43 of the Pension Schemes Act 1993 or section 38A(3) or 39 of the Pension Schemes (Northern Ireland) Act 1993 - contracted-out rebates and minimum contributions)
• not a recognised transfer-in, nor any other transfer into the pension scheme of any sums or assets held for the purposes of, or representing accrued rights under another pension scheme (including from a scheme that is not a registered pension scheme).

The way in which such a ‘small lump sum’ is taxed is explained in RPSM09105490.