RPSM03105580 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection: How to pay protected 25% plus lump sum benefits
How to pay protected lump sum benefits exceeding 25%
| [Para 34 Sch 36] |
Where an individual does have lump sum rights that exceed 25% of their uncrystallised pension rights in a scheme, paragraph 34 Schedule 36 FA 2004 modifies paragraphs 2 and 3 of Schedule 29 FA 2004. The modification allows the payment of a pension commencement lump sum with a value greater than 25% of the combined value of the lump sum itself plus the value of the connected pension.
Lump sum not more than available lifetime allowance and no partial transfer out
Partial transfers reduce amount of lump sum
Lump sum more than available lifetime allowance
No lifetime allowance available
100% tax free lump sums
Lump sum not more than available lifetime allowance and no partial transfer out
Where the payment of the lump sum benefit will not use up all of the individual’s available personal lifetime allowance (which may be greater than the standard lifetime allowance), and there has been no partial transfer out in respect of the individual the maximum amount of the lump sum payable as a pension commencement lump sum will be the amount of “VULSR” on 5 April 2006 increased in line with increases in the standard lifetime allowance or, from 6 April 2012, increased by 20% for so long as the standard lifetime allowance does not exceed £1.8 million, plus an additional lump sum (ALSA) which relates to an increase in the value of benefits after 5 April 2006.
Up to 6 April 2011
This amount was found by using the following formula
(VULSR x CSLA/FSLA) + ALSA
VULSR = the value of the individual’s uncrystallised lump sum rights under the scheme on 5 April 2006)
CSLA = the standard lifetime allowance when benefit entitlement arises
FSLA = £1.5 million.
ALSA is the amount found by the formula
| LS + AC - (VUR X CSLA/FSLA) |
| 4 |
LS = the amount of pension commencement lump sum actually paid
AC = the amount actually crystallised by becoming entitled to a pension in connection with which the pension commencement lump sum is paid, or the amount of the trivial lump sum paid in accordance with the conditions at RPSM03105516. Where a scheme pension is paid from a money purchase arrangement AC will be the scheme pension purchase price, i.e. the value of the sums and assets made available to provide the scheme pension
VUR = the value of the individual’s uncrystallised rights under the scheme on 5 April 2006.
From 6 April2011 to 5 April 2012:
This amount is found by using the following formula
(VULSR x CSLA/FSLA) + ALSA
VULSR = the value of the individual’s uncrystallised lump sum rights under the scheme on 5 April 2006)
CSLA = the standard lifetime allowance when benefit entitlement arises
FSLA = £1.5 million.
ALSA is the amount found by the formula
| LS + AC - (VUR X CSLA/FSLA) |
| 4 |
LS = the amount of pension commencement lump sum actually paid
AC = the amount actually crystallised by becoming entitled to a pension in connection with which the pension commencement lump sum is paid, or the amount of the trivial lump sum paid in accordance with the conditions at RPSM03105516. Where a scheme pension is paid from a money purchase arrangement AC will be the scheme pension purchase price, i.e. the value of the sums and assets made available to provide the scheme pension. Where, the member becomes entitled to the connected pension after reaching age 75 although there is no actual benefit crystallisation event AC is the amount that would have crystallised had there been such an event.
VUR = the value of the individual’s uncrystallised rights under the scheme on 5 April 2006.
From 6 April 2012
This amount is found by using the following formula
(VULSR x ULA/FSLA) + ALSA
VULSR = the value of the individual’s uncrystallised lump sum rights under the scheme on 5 April 2006)
ULA = is the greater of £1.8 million and the standard lifetime allowance when benefit entitlement arises
FSLA = £1.5 million.
ALSA is the amount found by the formula
| LS + AC - (VUR X CSLA/FSLA) |
| 4 |
CSLA = the current standard lifetime allowance or £1.8 million where this is greater and the individual has fixed protection. For more detail about fixed protection - see RPSM11101500.
LS = the amount of pension commencement lump sum actually paid
AC = the amount actually crystallised by becoming entitled to a pension in connection with which the pension commencement lump sum is paid, or the amount of the trivial lump sum paid in accordance with the conditions at RPSM03105516. Where a scheme pension is paid from a money purchase arrangement AC will be the scheme pension purchase price, i.e. the value of the sums and assets made available to provide the scheme pension. Where, the member becomes entitled to the connected pension after reaching age 75 although there is no actual benefit crystallisation event AC is the amount that would have crystallised had there been such an event.
VUR = the value of the individual’s uncrystallised rights under the scheme on 5 April 2006.
RPSM03105530 to RPSM03105550 explain how the value of VULSR and VUR is obtained.
If the formula gives a negative result, ALSA will be nil and no further additional lump sum can be paid.
Finding the maximum allowable pension commencement lump sum is relatively simple for money purchase arrangements. RPSM03105590 to RPSM03105610 give examples.
Finding the maximum allowable pension commencement lump sum under a defined benefits arrangement that provides lump sum benefits by commutation is more complex - unless the scheme uses a lump sum commutation factor of 20:1. RPSM03105612 gives an example of paying a protected lump sum of more than 25% from a defined benefits arrangement.
Partial transfers reduce amount of lump sum
Where there has been a partial transfer out in respect of the individual the amount of the lump sum is adjusted to reflect the transfer out - see RPSM03105630.
Lump sum more than available lifetime allowance
Where the value of the proposed lump sum benefit is greater than the available amount of the individual’s lifetime allowance, the proposed lump sum benefit should be calculated in the same way as described above. If all of the proposed lump sum benefit is paid, part of it will be subject to the lifetime allowance charge under section 214 Finance Act 2004 (see example in RPSM03105620).
No lifetime allowance available
Where the individual has already used all of their available personal lifetime allowance before becoming entitled to the lump sum, no pension commencement lump sum may be paid. Protection for the lump sum rights in the scheme has no effect.
100% tax free lump sums
Where on 5 April 2006 the individual has the right to take all their uncrystallised pension rights under all pension schemes relating to the same employment as a lump sum see RPSM03105640.
| Glossary (RPSM20000000) |
