RPSM03105090 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Valuing lump sum rights: The maximum permitted lump sum test

Valuing lump sum rights: the maximum permitted lump sum calculation

Statutory schemes set up before 14 March 1989

The value of the ’maximum permitted lump sum’ for arrangements under statutory schemes which were established before 14 March 1989 is the maximum lump sum that the scheme could pay the individual on 5 April 2006. It should be assumed that the individual left employment on or before 5 April 2006 and that no reduction is applied to the individual’s lump sum on account of their age on 5 April 2006. Further, the individual should be assumed to be in good physical and mental health.

Non- statutory schemes and statutory schemes set up after 13 March 1989

The value of the maximum permitted lump sum for arrangements under any other schemes or deferred annuity contract is the maximum lump sum that a scheme approved under Chapter 1 of Part 14 of Income Taxes Act 1988 could pay to an individual in good health on 5 April 2006 without giving HMRC grounds for withdrawing approval.

In arriving at the maximum permitted lump sum, assume that

• if the individual were in the employment to which the arrangement(s) related on 5 April 2006, the individual is deemed to have left the employment on that date, and
• HMRC would permit immediate payment of lump sum benefits on 5 April 2006 to an individual of whatever age, without affecting the approval of the scheme. Put simply, the fact that the deemed payment of the lump sum would be to an individual aged, say, 45 should not be taken as being an action that would cause HMRC to withdraw approval.

So for a pre-1987 member the N/NS x LS formula or the 3N/80ths formula will apply when calculating the maximum permitted lump sum.