RPSM03105516 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection: PCLS plus trivial lump sum

Payment of a scheme specific protected pension commencement lump sum with a trivial lump sum

[Article 23C The Taxation of Pension Schemes (Transitional Provisions) order 2006 - SI 2006/572 - as inserted by The Taxation of Pension Schemes (Transitional Provisions)(Amendment) Order 2009 - SI 2009/1172]

The normal rule is that a pension commencement lump sum must be paid in connection with an entitlement to a relevant pension - see RPSM09104130. However a scheme specific protected (25%+) pension commencement lump sum may also be paid in connection with a trivial lump sum - as defined below. Note that this is a special kind of trivial lump sum and it should not be confused with the usual trivial commutation lump sum.

If the lump sum is not paid in connection with either a relevant pension or a trivial lump sum, as defined below, the lump sum payment cannot be a pension commencement lump sum (PCLS).

What is a trivial lump sum?

A lump sum is a trivial lump sum if

• it is not more than £2000;
• when paid the member is aged at least 60 and is not yet aged 75;
• when paid the member has available lifetime allowance (as the PCLS will crystallise before the trivial lump sum there needs to be available lifetime allowance after payment of the PCLS);
• apart from any pension in payment before 6 April 2006 it extinguishes the member’s entitlement to benefit under the scheme;
• it is paid in connection with a scheme specific protected pension commencement lump sum, and no later than one month after payment of that PCLS; and
• since the payment of the PCLS

• no contributions have been made to the scheme in respect of the member
• no recognised transfer has been made into or out of the scheme in respect of the member, and
• no annuity or scheme pension has been purchased by sums or assets held by the scheme for the benefit of the member

Where the payment of a scheme specific protected PCLS leaves a very small amount in respect of the member to provide a pension this provision allows the total rights under the scheme to be paid in lump sum form. The PCLS will be tax free. The trivial lump sum is classed under the tax legislation as special kind of trivial commutation lump sum through commutation of crystallised rights. This means that payment of the trivial lump sum is not a benefit crystallisation event and that the whole trivial lump sum will be taxable at the member’s marginal rate of tax - see RPSM04101130.

Example

Andy has a protected lump sum of £100,000. The value of his total rights under his pension scheme is £102,000. On 1 June 2010 Andy has available lifetime allowance of £101,000. Andy’s pension scheme pays the whole of his rights to him as lump sums on 1 June 2010. £100,000 is paid as a PCLS and is not taxable. After paying the PCLS Andy still has £1,000 available lifetime allowance. The remaining £2,000 can be (and is) paid to Andy as a trivial lump sum. The whole £2000 is taxable and PAYE is applied to this trivial lump sum.