RPSM03111020 - Technical Pages: Protecting pension rights from tax charges: Pipeline lump sum: To the member

Lump sums paid to the member

[Articles 38 –39 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 –SI 2006/572] [The Registered Pension Schemes (Authorised Member Payments)(No.2) Regulations 2006 – SI 2006/571]

A lump sum which the member became entitled to before 6 April 2006 that

• is paid from a scheme that is deemed to be a registered pension scheme on 6 April 2006 by virtue of paragraph 1(1) Schedule 36 (see RPSM03111010) in the period 6 April 2006 to 5 July 2006,
• is paid in accordance with the rules of the scheme on 5 April 2006, and
• would not have given HMRC grounds to withdraw approval of the scheme

is not a benefit crystallisation event. No lifetime allowance will be used up by the payment and no lifetime allowance charge due.

The taxation of the lump sum depends on what kind of lump sum it is.

A lump sum paid on the member’s retirement (other than a lump sum obtained by trivial commutation) will be tax free.

A refund of member’s contribution (excluding surplus AVCs) will be taxable under s598 ICTA 1988.

A lump sum paid by way of trivial commutation will be taxable under s599 ICTA 1988.

A refund of surplus AVCs will be taxable under s599A ICTA 1988.

The scheme administrator of the registered pension scheme making the payment will be liable to the tax charges listed above.

Regulations 10 and 11 of the Retirement Benefits Schemes (Information Powers) Regulations 1995 – SI 1995/3103 – will continue to apply to these payments. Reports should be made to HMRC on form 1-SF or 2-SF (as appropriate). Form 1-SF should be submitted by 5 May 2007 and form 2-SF within the 180 days following 5 April 2007. Penalties for late notification or failure to notify HMRC will continue to apply.

For the avoidance of doubt a serious ill health lump sum paid where the

• the scheme administrator has received evidence from a registered medical practitioner that the member is expected to live for less than a year, and
• all the uncrystallised rights (except those retained in the scheme to meet contracting out requirements or to provide dependants’ pensions) are paid as a lump sum

will be tax free. Section 599 ICTA 1988 will not apply, neither will the payment be a benefit crystallisation event.