RPSM03105156 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Primary protection: Example stand-alone lump sum

Example of payment of a stand-alone lump sum to a member with primary protection and lump sum rights of more than £375,000

Peter makes a valid notification of primary protection. The amount of his protected lump sum rights is £600,000. In May 2007 Peter decides to take benefits from a scheme with funds of £400,000.

At this point the standard lifetime allowance is £1.6 million so Peter’s protected lump sum rights now have a value of £640,000.

Peter is aged 60 and the amount in the scheme is less than the amount of his protected lump sum rights. So Peter can take the whole amount as a stand-alone lump sum. Peter takes £400,000 as a stand-alone lump sum, which is paid tax free as he has not used up his available lifetime allowance.

Just over 5 years later when the standard lifetime allowance is £1.5 million Peter decides to crystallise further benefits from a couple of his schemes. Scheme 1 has a value of £250,000 and scheme 2 has a value of £2 million.

The value of Peter’s available protected lump sum rights is now £270,000.

(£600,000 x £1.8/1.5 million) - (£400,000 x £1.8/1.6 million) = £270,000.

See RPSM03105155 to find out how this figure has been arrived at.

Peter crystallises the whole £250,000 from scheme 1 as a stand-alone lump sum. From scheme 2 he takes a pension commencement lump sum of £20,000 (being the remainder of his protected lump sum rights). The remaining £1.98 million is used to provide a pension.