RPSM03105070 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Valuing lump sum rights: Uncrystallised rights

Valuing lump sum rights: uncrystallised rights under retirement benefits schemes or deferred annuity contracts

The first value (see RPSM03105060) is determined by finding the value of the lump sum that could have been paid had the individual become entitled to payment on 5 April 2006.

Where the lump sum rights arise under a defined benefit arrangement, a cash balance arrangement or an other money purchase arrangement the value of the uncrystallised lump sum rights must be calculated using two assumptions

1. the lump sum should be calculated assuming the individual to be 60 years of age, unless a different age was specified under the arrangement on 10 December 2003 as the age at which no reduction would apply to the payment of an immediate benefit in which case the individual should be assumed to be that age. Where the individual has already reached 60 or the age specified under the arrangement on 10 December 2003, the individual’s actual age on 5 April 2006 should be used when valuing the lump sum rights; and
   
2. that the individual is deemed to be in good physical and mental health on 5 April 2006.

Protected rights and AVCs that were started after 7 April 1987 could not be commuted into a lump sum on 5 April 2006, so they cannot be included in the scheme lump sum entitlement. Similarly where scheme rules allow for the payment of a lump sum of an amount up to HMRC limit and there are insufficient funds in the scheme to provide this amount the scheme entitlement will be the amount of the available funds not the higher HMRC lump sum limit. RPSM03105529 gives an example.

[Article 28 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 – SI 2006/572]

A lump sum paid before 6 April 2006 that is deemed to crystallise on 6 April 2006 (where the member elected to defer entitlement of the pension – see RPSM09104542) should be included in the valuation of uncrystallised lump sum rights. The value to be included is the actual value of the lump sum to which the member became entitled before 6 April 2006. Where a lump sum was paid before 6 April 2006 that is not deemed to crystallise on 6 April 2006 it should not be included in the valuation of lump sum rights.

For the purposes of paragraph 22(5)(b) Schedule 36 FA 2004 the value of uncrystallised lump sum rights in an arrangement or arrangements under a scheme (except for schemes within s611A(1)(a) ICTA 1988) or a deferred annuity contract will be the value of those rights subject to the amount of the lump sum not exceeding the HMRC limit applying to those lump sum rights under the scheme or contract. For individuals with pre 1987 rights the HMRC limit should take account of lump sum retained benefits – see RPSM03105100.

Where the individual has uncrystallised lump sum rights in more than one pension scheme relating to the same employment the rights should be valued separately under each scheme ignoring the value of rights held under other schemes in respect of the same employment.

The value of uncrystallised lump sum rights from ’relevant pension arrangements’ is described as VULSR in Schedule 36 Finance Act 2004.