RPSM03105155 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Primary protection: Stand-alone lump sums

Protection of lump sums exceeding £375,000 with primary protection: all benefits taken from a scheme as a stand-alone lump sum

[Articles 25 – 25D The Taxation of Pension Schemes (Transitional Provisions) Order 2006 – SI 2006/572 – as amended by The Taxation of Pension Schemes (Transitional Provisions) (Amendment No.2) Order 2006 – SI 2006/2004]

A pension commencement lump sum cannot be paid where all the benefits are being paid in lump sum form. This is because paragraph 1(1)(a) Schedule 29 requires a pension commencement lump sum to be paid in connection with an arising entitlement to a pension.

Where certain conditions are met it is possible for all a member’s uncrystallised rights in a registered pension scheme to be paid as a lump sum. This is a stand-alone lump sum.

Under protection of lump sum rights exceeding £375,000 with primary protection a monetary amount of lump sum is protected. Individuals can then choose, subject to scheme rules, how much lump sum they take from each scheme. So it would be possible for take all the benefits from a scheme as a stand-alone lump sum. This can happen where

• The member is aged less than 75,
• the member has reached the normal minimum pension age (or any earlier protected pension age they may have under the scheme) or is taking benefits earlier due to ill- health – see RPSM08100070, and
• all the member’s uncrystallised rights under the scheme come into payment as a single benefit crystallisation event.

Payment of a stand-alone lump sum is a benefits crystallisation event. It falls within benefit crystallisation event 6 (just as a pension commencement lump sum does). This means that the stand-alone lump sum is liable to the lifetime allowance charge if the individual does not have enough available lifetime allowance to cover the payment – see RPSM03105170. Apart from this a stand-alone lump sum can be paid tax free, just like a pension commencement lump sum – see RPSM04101070.

Amount of lump sum

The amount of the stand-alone lump sum is limited by the formula

VULSR - APCLS

Where

VULSR = value of the member’s uncrystallised lump sum rights as at 5 April 2006 (calculated as per RPSM03105030 – RPSM03105100) increased in line with the increase of the standard lifetime allowance.

APCLS = value of any pension commencement lump sum and/or stand-alone lump sum that has previously been paid to the member (increased in line with the increase of the standard lifetime allowance).

RPSM03105156 gives an example.

When a pension commencement lump sum is taken after a stand-alone has been taken the maximum allowable lump sum is adjusted to take account of the stand-alone lump sum that has previously been paid. RPSM03101560 gives an example of this.