RPSM03105211 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Enhanced protection: Example 2 of lump sum and enhanced protection
Example 2 of how to pay lump sums of more than £375,000 with enhanced protection
On 5 April 2006 Neville has uncrystallised lump sum rights (VULSR) of £450,000 and uncrystallised pension rights (VUR) of £3 million. Neville notifies HMRC of his reliance on enhanced protection. He has a lump sum percentage (VULSR/VUR) of 15%.
Neville’s benefits are held under 3 pension schemes. He can only take 15% of the value of the benefits crystallising under each pension scheme. He cannot choose to have the normal pension commencement lump sum payment rules apply to him as he has notified HMRC that he is covered by enhanced protection. He takes benefits from the schemes at different times.
In 2012, Neville crystallises £1 million from his first scheme - designating £850,000 as a drawdown pension fund to provide a drawdown pension and taking a pension commencement lump sum of £150,000. This is the maximum permitted by
VULSR/VUR x (the value of the funds designated + the lump sum)
Neville later takes benefits from a money purchase arrangement as a scheme pension of £28,500 pa and a lump sum of £90,000. Again this is the maximum permitted lump sum. As the scheme pension is provided from a money purchase arrangement it is the scheme pension purchase price that is used to calculate the maximum allowable lump sum. The cost of the scheme pension of £28,500 was £510,000. The cost of the scheme pension is known as the scheme pension purchase price. So the maximum allowable is
VULSR/VUR x (the scheme pension purchase price + lump sum)
£450,000/£3 million x (£510,000 + £90,000) = £90,000
From the third arrangement (which is defined benefits) Neville takes a scheme pension of £85,000 plus a lump sum of £300,000. The scheme pension is valued at £1.7 million (20 x £85,000) as it is provided from a defined benefits arrangement. This is the maximum allowable lump sum permitted by
VULSR/VUR x (value of the scheme pension + lump sum)
If Neville had taken a lump sum of less than £150,000 (the maximum allowable 15%) from his first scheme the other schemes could not pay a lump sum of more than 15% to make up the shortfall.
If Neville had been over 75 when he took his benefits, the above calculations would still apply to him. This is because although he did not take his pension benefits until after age 75 so they were not benefit crystallisation events, they are treated as though they were to enable the relevant value to be used in the calculation.
| Glossary (RPSM20000000) |
