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]
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.
However, where certain conditions are met it is possible for all of a member’s uncrystallised rights in a registered pension scheme to be paid as a lump sum. This is known as 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 an individual may take all the benefits from a particular scheme as a stand-alone lump sum. This can happen where
- The member is aged less than 75 (this condition does not apply after 5 April 2011),
- 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 or, from 6 April 2012, by 20% until such time as the prevailing standard lifetime allowance at the time the lump sum is taken is more than £1.8 million when the previous method of determining the increase re-applies.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). From 6 April 2012, the lump sum paid previously is increased by multiplying the amount of that lump sum by £1.8 million (or the standard lifetime allowance at the time the further lump sum is paid if this is greater), then dividing by the standard lifetime allowance at the time of payment. For example, if the further lump sum is paid in tax year 2012-13 when the standard lifetime allowance is £1.5 million, and the previous lump sum (£300,000) was paid in tax year 2007-08 when the standard lifetime allowance was £1.6 million, the previous lump sum is increased as follows - £300,000 x £1.8 million/£1.6 million giving an increased amount of £337,500.
RPSM03105156 gives an example.
When a pension commencement lump sum is taken after a stand-alone lump sum 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.
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