RPSM03105642 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection: Example stand-alone lump sum

Example of payment of a stand-alone lump sum under scheme specific lump sum protection

Before 6 April 2006 Martyn was a member of 3 retirement benefits schemes. Schemes A and B relate to employment 1. Scheme C relates to employment 2. On 5 April 2006 the value of Martyn’s rights under the schemes were

A - £50,000

B - £10,000

C - £300,000

All were within HMRC limits. All the benefits from schemes A and C could be used to provide lump sum benefits. Scheme B was an AVC scheme and so could not provide lump sum benefits before 6 April 2006.

Lump sum rights under schemes A and C are protected and can provide a pension commencement lump sum of more than 25%. However only scheme C has the potential to provide a stand-alone lump sum.

Whilst scheme A has a protected pension commencement lump sum, there is another scheme for employment 1that on 5 April 2006 could not pay Martyn lump sum benefits. Scheme A therefore fails the test that on 5 April 2006 all benefits in respect of an employment must have been able to be paid as a lump sum. As scheme C is the only scheme for employment 2 it meets this test. Scheme C is a money purchase arrangement and Martyn stopped paying contributions to this scheme before 6 April 2006. He therefore does not have any relevant benefit accrual under scheme C.

In 2012 scheme C is wound up and Martyn’s benefits are transferred to a new money purchase scheme – scheme D. The transfer is a block transfer so Martyn retains the right to the payment of a stand-alone lump sum.

In 2020 Martyn aged 60 decides to take benefits from scheme D. There has been no relevant benefit accrual for Martyn under scheme D. He has not previously taken any benefits from the scheme. So Martyn still has the right to payment of a stand-alone lump sum.

The standard lifetime allowance at this point is £2 million. By this time the value of Martyn’s funds in scheme D have increased due to investment growth to £550,000. This is more than the value of the funds that were in scheme C increased in line with the increase of the standard lifetime allowance. It is also more than 25% of the standard lifetime allowance.

Martyn has not taken any benefits previously so he has not used up any of his lifetime allowance.

Martyn can take £550,000 as a tax free stand-alone lump sum.