PSI8.1.5 - Lump Sum Benefits and Communication: Maximum Lump Sum Benefits - Additional Voluntary Contributions

(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)

[PN8.3]

Retirement benefits arising from a member's additional voluntary contributions (whether paid to an employer's scheme or a free-standing additional voluntary contributions scheme) cannot be taken in lump sum form. However, this restriction does not apply

1. where the contributions are made under arrangements entered into by employees before 8 April 1987, or [PN8.4]
2. where the scheme benefits are in the form of a pension and a separate lump sum and additional voluntary contributions are paid to purchase a number of added years of service which will produce a precise level of pension and lump sum benefits.

Pensions arising from additional voluntary contributions (including free-standing additional voluntary contributions) can be used in the calculation of the lump sum provided they themselves are not commuted - but see PSI25.3.7 where AVC benefits come into payment later than employer funded benefits. This ban on commutation of additional voluntary contributions (AVC) benefits was introduced by the Finance (No2) Act 1987, now paragraph 7, Schedule 23, ICTA 88, in respect of schemes approved before 23 July 1987. For schemes approved subsequently it must feature in scheme rules under revised discretionary practice as a condition of approval under section 591 ICTA 1988 (see PSI2.3.13). The statutory override in Schedule 23 is disapplied in two ways by the Occupational Pension Schemes (Transitional Provisions) Regulations 1988. Regulation 6 permits commutation of AVC benefits on grounds of triviality or serious ill health (see Section 3 of this Part); Regulation 10 permits commutation where AVCs recommence or are varied on or after 8 April 1987 under the same arrangement or an arrangement of a relevant employer. The same protection is available where discretionary practice applies, where we consider the circumstances by analogy with the regulations.