RPSM03105170 - Technical Pages: Protecting pension rights from tax charges: Lump sum rights: Primary protection: Benefits taken at different times – example 1

Protection of lump sums with primary protection: taking benefits at more than one time - some lump sum benefits are not tax-free: example 1

Jane has primary protection for her pension rights, and her lump sum rights on 5 April 2006 exceeded £375,000. She has already taken some benefits after 5 April 2006 under primary protection.

Her remaining rights are in a money purchase arrangement, which are valued at £1 million. Her available protected pension rights are valued at £600,000, which means her available personal lifetime allowance is £600,000. The amount of protected lump sum is £700,000 - her protected lump sum rights are greater than her available personal lifetime allowance.

Jane takes a pension commencement lump sum of £700,000, using up all of her available lifetime allowance. She takes the balance of the £1 million (£300,000), as a lifetime annuity. £600,000 of her pension commencement lump sum is free of income tax, but £100,000 is liable to the lifetime allowance charge under section 214 Finance Act 2004. So she receives £600,000 tax-free and a further lump sum of £45,000 after tax under the lifetime allowance charge.

Jane cannot take all of her protected lump sum amount tax-free because the maximum amount of pension commencement lump sum exceeds the amount of her available lifetime allowance.

Because Jane took too little lump sum when she took her earlier benefits, the full aggregate lump sum available under protection was not paid entirely free of income tax.