RPSM03105080 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Valuing lump sum rights: The HMRC limits test

Valuing lump sum rights: the HMRC limits test

Before 6 April 2006, some individuals had pension rights that were restricted by limits on the benefits that retirement benefit schemes and deferred annuity contracts (section 32 policies) could provide.

It would be inappropriate to permit individuals to protect lump sum rights at 5 April 2006 at a higher level than the limits then in place would have allowed. Retirement benefit schemes and contracts covered by these limits are listed in paragraph 9(1) of Schedule 36 Finance Act 2004 but are repeated here for ease of reference.

• a retirement benefits scheme approved under Chapter 1 Part 14 Income and Corporation Taxes Act (ICTA) 1988
• a scheme formerly approved under section 208 ICTA 1970
• a relevant statutory scheme (as defined in section 611 ICTA 1988) or a scheme treated by HMRC as if it were a relevant statutory scheme.
• a deferred annuity contract (s32 contract) entered into in relation to the schemes above.

Where an individual has uncrystallised lump sum rights in a scheme or contract listed above the lump sum rights must be tested against the HMRC limits.

For each employment which has generated pension and/or lump sum rights at 5 April 2006, there will be a limit on the amount of benefit which could be paid to the individual. This limit is defined in paragraph 26 Schedule 36 Finance Act 2004 as the ’maximum permitted lump sum’ (see RPSM03105090).

Where the value of an individual’s uncrystallised lump sum rights relating to an employment, as valued by paragraph 25 Schedule 36 Finance Act 2004 (see RPSM03105060), exceeds the value of the maximum permitted lump sum, the maximum permitted lump sum value becomes the value for those rights which may be protected.

The total value for the individual’s uncrystallised lump sum rights must be adjusted accordingly.