RPSM03105210 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Enhanced protection: Example 1 of lump sum protection and enhanced protection

Protection of lump sum rights with enhanced protection: example 1

Sally has uncrystallised lump sum rights of £400,000 and uncrystallised pension rights of £2 million on 5 April 2006. This gives (VULSR ÷ VUR) of 20%. She takes benefits from three schemes on different dates whilst retaining enhanced protection.

Sally takes benefits from the first scheme, which are worth £1 million, by taking unsecured pension (from 6 April 2011 called drawdown pension) using income withdrawal. She designates assets valued at £800,000 for the payment of her unsecured pension and takes a lump sum benefit of £200,000. This is the maximum permitted by (VULSR ÷ VUR) multiplied by the value of the funds designated for the payment of unsecured pension plus the lump sum - paragraph 29 (2) of Schedule 36 Finance Act 2004. She cannot take the higher amount of 25% under the usual pension commencement lump sum rules. Sally’s notification of enhanced protection has changed the maximum amount of lump sum she can be paid when she crystallises benefits.

Sally takes benefits from the second scheme worth £750,000 in the form of a lifetime annuity bought for £600,000 and a lump sum benefit of £150,000. This is the maximum permitted by (VULSR ÷ VUR) multiplied by the value of the annuity purchase price plus the lump sum - paragraph 29 (2) of Schedule 36 Finance Act 2004.

Sally takes benefits from the third scheme (which is a defined benefits arrangement) as a scheme pension of £20,000 plus a lump sum benefit of £100,000. The scheme pension is valued at £400,000 (20 x the annual pension of £20,000). And the lump sum is the maximum permitted by (VULSR ÷ VUR) multiplied by the value of the scheme pension plus the lump sum - paragraph 29 (2) of Schedule 36 Finance Act 2004.

If one of Sally’s schemes paid her a lump sum of 15% of the combined value of her lump sum and pension benefits (because scheme rules did not permit a larger lump sum) her other schemes could not pay her a lump sum greater than 20% to make up the “shortfall”.