PTM063400 - Member benefits: lump sums: serious ill-health lump sum
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives.
If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
Glossary |
Payment of a serious ill-health lump sum
What is meant by an uncrystallised arrangement in the context of paying a serious ill-health lump sum
Taxation of a serious ill-health lump sum
Reporting payment of a serious ill-health lump sum to HMRC
Payment of a serious ill-health lump sum
Sections 637C Income Tax (Earnings and Pensions) Act 2003, 216(1), paragraph A2 Schedule 32 and paragraph 4 Schedule 29
If a member is suffering from serious ill-health (as defined below) then, provided certain conditions are met, the scheme administrator may commute any pension entitlement which that member holds under the scheme and pay them their entire benefit entitlement under an arrangement as a lump sum. This is referred to in the legislation as a serious ill-health lump sum.
Conditions that must be met for a payment to be a serious ill-health lump sum
There is no minimum age for the payment of a serious ill-health lump sum.
The conditions that all must be met in order for a payment to be treated as a serious ill-health lump sum are:
- before making the payment the scheme administrator has received written evidence from a registered medical practitioner (as defined below) confirming that the member is expected to live for less than one year
- for payments made before 16 September 2016, the payment extinguishes the member’s entitlement to benefits under the arrangement (this means that all of the benefits under the arrangement must be commuted and paid as a serious ill-health lump sum). Before that date, a serious ill-health lump sum could not be paid from an arrangement that had previously crystallised or paid any benefit, and
- for payments made on or after 16 September 2016, the payment must extinguish all uncrystallised rights under the arrangement. If no benefits have yet been taken under the arrangement (none have crystallised so far), this means that all of the rights in the arrangement must be commuted and paid as a serious ill-health lump sum. If only some benefits have previously crystallised, then the full remainder of uncrystallised rights under the arrangement must be commuted for the serious ill-health lump sum.
The reference to extinguishing the member’s entitlement to benefits or to uncrystallised rights under the arrangement is to all the benefits or rights that could reasonably have been known about at the time of the payment. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision. Where because of contracting-out requirements, dependants' benefits have to be retained under the scheme, then either before or at the time a serious ill-health lump sum is paid, the dependants' benefits might be moved to a separate arrangement to satisfy the above conditions. This requires no more than documenting the creation of a new arrangement in a manner which is considered acceptable under the scheme.
There are no limits imposed on the payment of a serious ill-health lump sum. Under a money purchase arrangement, the payment will be funds held in that arrangement. With a defined benefits arrangement, it is for the scheme to attribute a capital value to the pension benefit entitlement being commuted.
A registered medical practitioner
Paragraph 4(1)(a) Schedule 29 Finance Act 2004
A registered medical practitioner means a fully registered person within the meaning of the Medical Act 1983. However, in circumstances where the member in ill-health PTM062100 or serious ill-health (as described above) is overseas, the term "registered medical practitioner" may also be interpreted for the purpose of the tax rules as including a certificate from someone with equivalent overseas qualifications.
We would always expect that a member in the UK would need to have evidence from a UK registered medical practitioner.
What is meant by 'uncrystallised' in the context of paying a serious ill-health lump sum
S212(1) & (2), paragraph 4(2) & (2A) Schedule 29 Finance Act 2004
An uncrystallised arrangement is an arrangement in respect of which the member hasn't previously become entitled to a pension or lump sum. Where a member has a drawdown pension fund or a flexi-access drawdown fund under the arrangement, they are for this purpose considered to be already entitled to the present payment of the benefit from those funds even if they are not presently drawing any pension from those funds.
Article 33 of The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572
Where a member was in receipt of a pension from a scheme before 6 April 2006, a serious ill-health lump sum can only be paid in relation to any prospective right to a pension under the scheme on 6 April 2006.
Taxation of a serious ill-health lump sum
Section 212(1) & (2) and paragraph 4(2) (2A) Schedule 29 Finance Act 2004
Section 637C, 637Q - 637S Income Tax (Earnings and Pensions) 2003
A serious ill-health lump sum is a relevant lump sum and a relvant benefit crystallisation event.
There is no charge to income tax on either the member or the scheme administrator on payment of a serious ill-health lump sum paid to a member who is aged under 75 if the lump sum doesn't exceed the "permitted maximum".
The permitted maximum is the amount of the member's available lump sum and death benefit allowance. Where the serious ill-health lump sum is more than the permitted maximum, the amount by which it exceeds the permitted maximum is taxed as pension income at the member's marginal rate.
A serious ill-health lump sum paid to a member who has reached the age of 75 is taxed as pension income (at marginal rates) of the recipient member.
Where part or all of the lump sum is taxable the payer of the lump sum will deduct and account for Income Tax under the requirements of the PAYE regulations (see PTM024600).
Reporting payment of a serious ill-health lump sum to HMRC
Section 251(1)(a) and (4)(a) Finance Act 2004
Regulation 3, ‘reportable Events’ 4 and 24 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567
There are two circumstances where the scheme administrator must report the payment of a serious ill-health lump sum to HMRC.
The first circumstance is where the recipient of the payment is:
- a director of the sponsoring employer of the scheme in the year of payment (or has been in the previous six years) or
- connected to such a director in the same period, or
- alone or with others, represented the sponsoring employer in that time, or
- connected to that employer.
The value of the serious ill-health lump sum paid is not a factor.
The second circumstance is where the payment exceeds the member's lump sum and death benefit allowance.
These requirements are explained in more detail in PTM161100.
A scheme administrator failing to make the required report will become liable to penalties - see PTM160800.