RPSM03105160 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Primary protection: Stand-alone lump sum plus PCLS

Protection of lump sums with primary protection: taking benefits at more than one time - some lump sum benefits are not tax-free: example of a stand-alone and then a pension commencement lump sum payment

Sally has lump sum rights of £1 million on 5 April 2006 and has primary protection on pension rights of £5 million. She has rights in two arrangements. Her lump sum rights are payable by commuting pension rights.

She takes benefits on 23 April 2009, her 55^th birthday, from the smaller of the two arrangements. The standard lifetime allowance in 2009-2010 is £1.65 million. The amounts of her protected pension and lump sum have increased in line with the increase in the standard lifetime allowance to £5.5 million and £1.1 million (each amount being multiplied by £1.65 million/£1.5 million).

As the smaller arrangement, a money purchase arrangement, is valued at £600,000 she chooses to take all her benefit as a stand-alone lump sum.

Sally takes benefits from her second arrangement in 2015-16 when the standard lifetime allowance is £1.5 million. The amounts of her protected pension and lump sum have increased to £6 million and £1.2 million - see RPSM03102020 to find out how these figures have been arrived at.

Sally has taken benefits previously so the amounts of benefits currently protected must be reduced by the value of the earlier benefits. The value of the earlier benefits must be increased in line with the increase in the standard lifetime allowance from its value when the benefits were taken to its current value. In this example, the standard lifetime allowance has reduced from £1.65million to £1.5 million. However, the reduction has no impact because the figure of £1.8 million replaces the standard lifetime allowance since it is a lower amount. See RPSM03105155 for more details.

The value of the £600,000 stand-alone lump sum taken in 2009 is therefore £654,545 (£600,000 x 1.8/1.65).

Sally’s available protected pension and lump sum are therefore £5,345,455 (£6 million - £654,545) and £545,455 (£1.2 million - £654,545) respectively.

Her second arrangement is a money purchase arrangement worth £8.3 million. She takes a pension commencement lump sum of £545,455 and uses the remainder of her protected pension rights, £4.8 million, to buy a lifetime annuity.

The residue of £2,954,545 in the arrangement (£8.3 million less protected pension rights of £5,345,455) is liable to the lifetime allowance charge. From this residue she takes a lifetime allowance excess lump sum of £1,329,545 after deduction of 55% tax (£1,625,000) under the lifetime allowance charge00.