PSI8.1.24 - Lump Sum Benefits and Communication: Maximum Lump Sum Benefits - Finance (No 2) Act 1987 Regime

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

[PN8.27]

For members with pre-1 June 1989 continued rights, ie, those who joined their schemes on or after 17 March 1987 and do not have pre-17 March 1987 continued rights but are not subject to the Finance Act 1989 regime, the table in PSI8.1.23 applies but is subject to the restriction that where less than maximum approvable total benefits are given (1/30th of final remuneration for each year of service (up to 20 years) (see PSI6.5.8)), the maximum approvable lump sum available by commutation is 3N/80ths plus a percentage of the difference between 3N/80ths and the maximum available on the table in PSI8.1.23. This percentage matches the percentage uplift of pension benefits over N/60ths. Paragraphs 3 (lump sums by commutation - see PSI8.1.2 (a)) and 4 (separate lump sums - see PSI8.1.2 (b)) of Schedule 23 ICTA 1988 give effect to this provision in respect of schemes approved before 23 July 1987. In relation to schemes approved on or after 23 July 1987, the limit must be reflected in scheme rules under revised discretionary practice as a condition of approval.

Under section 591 ICTA 1988 (see PSI2.3.13), transitional regulations or arrangements apply as in PSI2.3.23.

The maximum approvable lump sum can be calculated by the formula:

[(A - B)/ C - B x (D - E)] + E, where

A is the scheme pension payable (excluding any pensions payable from transfer values received) expressed in monetary terms, before any reduction to take account of commutation or allocation for widows'/widowers'/dependants' benefits. In the circumstances set out in PSI6.1.16 it is the initial amount of pension payable up to SPA.

B is a pension equivalent to 1/60th of "relevant annual remuneration" for each year of service (up to 40 years) before any deductions as at A above.

"Relevant annual remuneration" means final remuneration or, if the scheme provides for benefits to be calculated on some other remuneration, that other remuneration.

C is a pension equivalent to 1/30th of "relevant annual remuneration" for each year of service, (up to 20 years) before any deductions as at A above.

D is a sum equivalent to the number of 80ths of "relevant annual remuneration" appropriate for the total years of service as set out in PSI8.1.23.

E is a sum equivalent to 3/80ths of "relevant annual remuneration" for each year of service (up to 40 years).

[PN8.29]

Where schemes provide separate lump sums the formula should be amended by substituting 1/80th for 1/60th in B and 1/40th for 1/30th in C. The “relevant annual remuneration” used to calculate D and E should not exceed £100,000.

It is not acceptable to use dynamised "relevant annual remuneration" for the purposes of calculating D and E unless to the same proportionate extent that dynamised "relevant annual remuneration" has been used to calculate B and C.

Where the maximum approvable total benefits are given (1/30th of final remuneration for each year of service (up to 20 years)) (see PSI6.5.8), lump sum benefits will be granted in accordance with the table in PSI8.1.23. In these circumstances, the lump sum must be calculated by reference to the same measure of final remuneration as that used to calculate total benefits.

A different limit applies where an employee’s benefit rights in the scheme are reduced by a pension sharing on divorce order and the pension debit must be taken into account for Revenue limits purposes (see PSI8.1.44).

In calculating the maximum permissible lump sum in respect of a member with pre-1 June 1989 continued rights, the value of any retained lump sum retirement benefits (see PSI8.1.31) may be ignored.