RPSM03105510 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection

Protecting lump sum rights that exceed 25% of uncrystallised pension rights

Some individuals in retirement benefit schemes or deferred annuity contracts (section 32 policies) will have lump sum rights on 5 April 2006 that exceed 25% of their uncrystallised pension rights. Individuals may have such lump sum rights in one scheme but not in any other scheme in which they have rights. As the rights are held in particular schemes it was decided that scheme administrators could pay lump sum benefits, which exceed 25% by value, based on scheme records showing the member’s uncrystallised pension and lump sum rights on 5 April 2006. Schedule 36 Finance Act 2004 sets out how the calculation of lump sum rights should be made and the conditions applying to the payment of the benefits.

Paragraphs 31-34 of Schedule 36 Finance Act 2004 make provisions for schemes to pay such individuals a higher lump sum than 25% of the two benefit crystallisation events that occur when the individual’s rights come into payment. The benefit crystallisation events being: the pension being brought into payment; and the pension commencement lump sum associated with this pension. Where an individual could take 100% of their rights under the scheme on 5 April 2006 as a lump sum benefit there may be a single benefit crystallisation event, i.e. where no benefits accrue after 5 April 2006 all the scheme benefits may be paid as a lump sum.

Where protection of lump sum rights of more than 25% does not apply

This form of protection does not apply where an individual has lump sum rights exceeding £375,000 at 5 April 2006 and has claimed primary protection, or enhanced protection, or both. (The measure of lump sum rights of more than £375,000 includes not only uncrystallised lump sums but also the deemed value of lump sum rights that were taken before 6 April 2006.) In those cases, protection for their lump sum rights will apply as set out in RPSM03105135 under primary protection, or RPSM03105185 under enhanced protection.

This form of protection cannot apply to personal pension schemes or retirement annuity contracts.