RPSM03105640 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection: Stand-alone lump sums

Stand-alone lump sums

[Articles 25 – 25D The Taxation of Pension Schemes (Transitional Provisions) Order 2006 – SI 2006/572 – as amended by The Taxation of Pension Schemes (Transitional Provisions)(Amendment No.2) Order 2006 – SI 2006/2004]

A pension commencement lump sum cannot be paid where all the benefits are being paid in lump sum form. This is because paragraph 1(1)(a) Schedule 29 requires a pension commencement lump sum to be paid in connection with an entitlement to a pension.

Where on 5 April 2006 an individual was a member of a scheme under which they were entitled to take all their uncrystallised rights as a lump sum the individual can still receive all their benefits in lump sum form if certain conditions are met. Where such a lump sum is paid the lump sum is called a stand-alone lump sum.

A stand-alone lump sum can be paid from a scheme with scheme specific protection of lump sums where,

• the member has reached the normal minimum pension age (or any earlier protected pension age they may have under the scheme) or is taking benefits earlier due to ill-health – see RPSM08100070, and the member is aged less than 75,
• the entitlement to the lump sum is a single benefit crystallisation event that crystallises all of the member’s rights under the scheme that had not crystallised before 6 April 2006,
• there has been no relevant benefit accrual (see RPSM03104080) for the individual under the scheme after 5 April 2006,
• the member did not have lump sum rights of more than £375,000 on 5 April 2006 where either primary or enhanced protection applies when the lump sum is paid,
• on 5 April 2006 all the member’s uncrystallised rights (calculated in accordance with RPSM03105070) under the scheme and any other scheme within paragraph 1(1) (a) – (e) Schedule 36 relating to the same employment could have been paid out as a tax free lump sum, and
• the total value of the member’s uncrystallised lump sum rights lump sum provided under all schemes within paragraph 1(1) (a) – (e) Schedule 36 relating to the same employment (calculated as per the previous bullet point) was not more than the maximum permitted lump sum as described in RPSM03105090 (description for non statutory schemes).

Payment of a stand-alone lump sum is a benefit crystallisation event. It falls within benefit crystallisation event 6 (just as a pension commencement lump sum does). This means that the stand-alone lump sum is liable to the lifetime allowance charge if the individual does not have enhanced protection or enough available lifetime allowance to cover the payment – see RPSM03105620. Apart from this a stand- alone lump sum can be paid tax free, just like a pension commencement lump sum – see RPSM04101070.

Transfers into or out of a registered pension scheme under which the member has the right to a stand-alone lump sum may cause the member to lose their right to a stand-alone lump sum. RPSM03105641 explain what transfers will cause the individual to lose their right to a stand- alone lump sum.

Amount of stand-alone lump sum

There is no set upper limit on the amount of stand-alone lump sum.

• Other money purchase arrangements can pay a stand-alone lump sum that includes the full investment return on the value of the lump sum rights as at 5 April 2006. This can happen even though this is more than the 5 April 2006 value indexed in line with the standard lifetime allowance.
• Defined benefits or cash balance arrangements can pay a stand-alone lump sum up to the amount of the appropriate limit. ( RPSM03104525 explains what the appropriate limit is.)

RPSM03105642 gives an example.