RPSM03105202 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Enhanced protection: 100% lump sum

Enhanced protection and lump sums of more than £375,000: prospective lump sum rights are 100% of rights on 5 April 2006

[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 on 5 April 2006 an individual’s total uncrystallised rights in all relevant pension arrangements could have been taken entirely as a lump sum benefit the individual can still receive all their benefits in lump sum form if certain conditions are met. Where such a lump sum is paid the lump sum is called a stand-alone lump sum.

A stand-alone lump sum may be payable to an individual with enhanced protection where

• on 5 April 2006 all the member’s rights under all schemes (that become registered pension schemes on 6 April under the provisions of paragraph 1(1) Schedule 36) could have been paid out as a tax free lump sum without giving HMRC grounds for withdrawing scheme approval. In making this test it is assumed that the member has left employment and that HMRC would allow the immediate lump sum payment on 5 April 2006 whatever the member’s age without affecting the scheme’s approval. In valuing the lump sum right it should also be assumed that if the member was not old enough to take an unreduced lump sum under the scheme on 5 April 2006, the benefit should be calculated assuming the individual to be 60 years of age, unless a different age was specified under the arrangement on 10 December 2003 as the age at which no reduction would apply to the payment of an immediate benefit in which case the individual should be assumed to be that age
• all the benefits are paid out from a pension scheme at the same time as a single benefit crystallisation event,
• the member is aged less than 75, and
• 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.

Payment of a stand-alone lump sum is a benefit crystallisation event. It falls within benefit crystallisation event 6 (just as a pension commencement lump sum does). The stand-alone lump sum is not liable to income tax (except for tax under the lifetime allowance charge), so whilst the member has valid enhanced protection the stand-alone lump sum is tax free.

Amount of stand-alone lump sum

There is no set upper limit on the amount of stand-alone lump sum whilst the member has valid enhanced protection.

Other money purchase arrangements can pay a stand-alone lump sum which includes the full investment return on the value of the lump sum rights as at 5 April 2006 even though this is more than the 5 April 2006 value indexed in line with the standard lifetime allowance.

Defined benefits or cash balance arrangements can pay a stand-alone lump sum up to the amount of the appropriate limit. ( RPSM03104525 explains what the appropriate limit is.)

Transfers causing loss of right to a stand-alone lump sum

The right to a stand-alone lump sum will be lost if a transfer is received from a pension scheme that is not a registered pension scheme.