| [Para 32 Sch 36] |
Only lump sums that could have been paid under the tax regime in
existence before 5 April 2006 can be protected. This means
protected lump sum rights (VULSR) must be within HMRC limits before
5 April 2006. Valuing an individual's lump sum rights on 5 April
2006 is therefore a three stage process.
Step 1
Identify the individual's lump sum entitlement under the
scheme. The scheme rules will set out what the individual’s
lump sum entitlement is.
Step 2
Identify the individual's maximum allowable lump sum under
HMRC limits for each pensionable employment.
Step 3
Where the lump sum entitlement for a pensionable employment
under step 1 is more than the HMRC allowable lump sum for that
pensionable employment under step 2 the lump sum entitlement under
step 1 must be cut back.
A similar three step process applies to the valuation of
pension rights (VUR) on 5 April 2006.
Under the pre 6 April 2006 tax regime protected rights and
AVCs that were started after 7 April 1987 could not be commuted
into a lump sum. So they cannot be included in the scheme lump sum
entitlement under step 1 above. Similarly many scheme rules will
allow for the payment of a lump sum of an amount up to HMRC limits.
Where there are insufficient funds in the scheme to provide this
amount the scheme entitlement under step 1 will be the lower amount
of the available funds.
Example
On 5 April 2006 Susan was a member of a pension scheme providing benefits on a money purchase basis. The scheme rules allowed for the payment of a lump sum up to HMRC limits. Under HMRC limits Susan’s maximum lump sum was £50,000. However the value of Susan’s rights under the scheme on 5 April 2006 was £45,000. Of that amount £5000 related to AVCs that she started to pay in 1997. Another £10,000 of the funds represented protected rights.
So on 5 April 2006 the amount that was available to provide a lump sum was only £30,000. This is the amount of Susan’s lump sum entitlement under the scheme that should be shown at step 1.
RPSM03105530 to RPSM03105570 gives more information, with examples, of the valuation of VULSR and VUR in specific circumstances.
| Glossary ( RPSM20000000) |
