PSI25.2.12 - Flexibility in Pension Provision – Annuity Deferral/Income Drawdown – Lump Sum Benefit

(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)

For scheme members whose lump sum retirement benefit is not calculated by reference to the amount of pension payable, the use of income drawdown will not affect the amount of the lump sum benefit.

However, members whose lump sum retirement benefit is based on their pension (see PSI8.1.24 and PSI8.1.25) will only be able to draw a lump sum as measured by the amount of initial pension payable before commutation and any allocation - see the two examples below of a calculation of a Finance Act 1989 regime member's lump sum under income drawdown.

Example 1

1st stage: value Member’s Gross Scheme Fund and check for surplus over maximum benefits

Member’s Gross Scheme Fund value: £200,000

open market annuity rate (RPI + 10 yr gte) 18: 1

member’s maximum approvable benefit: £20,000 pa

maximum permissible fund is £360,000 (£20,000 x 18)

therefore

the whole of the Member’s Gross Scheme Fund of £200,000 can be brought forward into the drawdown process.

therefore

the permissible lump sum is £37,500 if income drawdown of £13,542 pa is taken.