RPSM03105560 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection: Example 1 valuation where lump sum is over HMRC limit

Valuing lump sum benefits exceeding 25%: lump sum benefits on 5 April 2006 exceed HMRC limits: example 1

Asif has pension and lump sum rights for a single employment on 5 April 2006. His total pension rights are £210,000 and total lump sum rights are £60,000. These rights are held in three schemes. His rights are held in a single arrangement under each scheme.

Asif’s maximum permitted lump sum for the employment under HMRC limits was calculated as £54,000. So his lump sum rights exceed HMRC limits by £6000. His maximum permitted pension under HMRC limits was greater than £210,000.

Therefore VULSR must be adjusted whilst VUR remains the same.

The position before adjustment was as follows

• Scheme 1 - pension rights of £60,000; lump sum £15,000; lump sum percentage 25%
• Scheme 2 - pension rights of £60,000 ; lump sum £20,000; lump sum percentage 33.33%
• Scheme 3 - pension rights of £90,000; lump sum £25,000; lump sum percentage 27.78%

The reduction in Asif’s lump sum rights from £60,000 to £54,000 must be apportioned amongst the three schemes. The legislation specifies that the apportionment is as follows.

So for scheme 1 the apportionment would be

After adjustment, Asif’s lump sum percentage from each of the three schemes becomes

• Scheme 1 - pension rights of £60,000; lump sum £13,500; scheme percentage 22.5%
• Scheme 2 - pension rights of £60,000; lump sum £18,000; scheme percentage 30%
• Scheme 3 - pension rights of £90,000; lump sum £22,500; scheme percentage 25%

So after the required adjustment, only the rights in Scheme 2 qualify for protection as the lump percentage exceeds 25% of the uncrystallised pension rights in that scheme.

Rights in schemes 1 and 3 may be taken at 25% because the normal rules for pension commencement lump sums in Schedule 29 Finance Act 2004 apply to the rights under those two schemes.