RPSM03106060 - Technical Pages: Protecting pension rights from tax charges: Taking benefits before normal minimum pension age: Taking benefits

Taking benefits

When a member with a protected pension age takes their pension and/ or lump sum benefits before normal minimum pension age, they must become entitled to all of their pension and lump sum rights (that were not in payment on 5 April 2006) under the registered pension scheme on the same day.

This condition also applies where there has been a block transfer of rights. The scheme that receives the block transfer must crystallise all the uncrystallised pension and lump sum rights on the same day.

This condition (taking all benefits on the same day) will still be met where the individual dies within six months of the payment of a pension commencement lump sum and before becoming entitled to the relevant pension.

[Articles 42 & 43 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572]

The condition will also be met if the member has as least two of the following types of pension under the same pension scheme

• A scheme pension under a defined benefits arrangement,
• A scheme pension under a money purchase arrangement,
• A lifetime annuity, and

either

1. the member becomes entitled to all their benefits under the scheme within a six months period beginning with entitlement to the first of any type of pension under the scheme,

or

2. the member becomes entitled to at least one of their pensions and dies within six months of the first pension entitlement date without becoming entitled to all their pensions under the scheme, and the scheme administrator considers that if the member had not died they would have become entitled to all their pensions under the scheme within the six month period.

Taking the lump sum benefit from the scheme and then transferring the remaining benefits to another scheme and designating them into drawdown pension fund (in the receiving scheme) would not be becoming entitled to all rights under the same scheme. In these circumstances the whole lump sum will be an unauthorised member payment.

If the scheme that has the protected pension age does not offer a drawdown pension fund facility, to be authorised payments the individual has two options

1. Transfer the rights into a new scheme that does provide a drawdown pension fund facility before crystallising any benefits from the transferring scheme. The benefits can then be fully crystallised under the receiving scheme as a pension commencement lump sum and drawdown pension fund. Unless the transfer is a block transfer the right to a protected pension age will be lost.
2. Stay within the protected pension scheme and use the form of pension offered by that scheme. The low pension age will remain protected but the individual will not be able to have a drawdown pension fund.

Some schemes may be designed so that they contain some benefits payable to an individual before the normal minimum pension age (because they qualify for protection) and some benefits payable to that individual after having reached normal minimum pension age. For the avoidance of doubt, unless the member meets the ill health condition (see RPSM08100070), if the individual wishes to take any benefits before normal minimum pension age then all their benefits in the scheme must crystallise.

If the individual was to only crystallise those benefits benefiting from a protected pension age and left other uncrystallised benefits in the scheme (whether or not they are held in a different arrangement) those benefits would be unauthorised. Every payment made until the member reached normal minimum pension age would be an unauthorised member payment and taxable as such (see RPSM04104000). In addition when the member did reach normal minimum pension age they would not be entitled to a pension commencement lump sum in respect of the pension paid before normal minimum pension age.