RPSM03302030 - Scheme Administrator Pages: Protecting pension rights from tax charges: Valuing lump sums: Uncrystallised lump sums – RBS

How are uncrystallised lump sums valued - retirement benefit schemes and deferred annuity contracts?

For the schemes listed on RPSM03301030, there are two steps involved in calculating the amount of lump sum that can be protected. If the figure produced from the step 2 calculation is lower than the step 1 calculation, the step 2 calculation figure must be used.

If scheme specific protection of lump sums of more than 25% is in point and the figure produced from step 2 is less than step 1 amount a further step must be carried out to find the amount to be protected. RPSM03302130 and RPSM03302140 give more information on the valuation of lump sum rights for scheme specific lump sum protection.

Step 1

Find the value of the lump sum rights in accordance with the pension scheme rules as they stood on 5 April 2006. The value of the rights must be calculated using two assumptions

• the individual had reached age 60 unless a different age was set out under the terms of the arrangement as they stood on 10 December 2003 as the age at which no reduction would apply to the payment of an immediate benefit in which case the individual should be assumed to be that age. Where the individual has already reached 60 or the age specified under the arrangement on 10 December 2003, the individual’s actual age on 5 April 2006 should be used when valuing the lump sum rights; and
• the individual is deemed to be in good physical and mental health on 5 April 2006.

The value of uncrystallised lump sum rights in an arrangement or arrangements under a scheme (except for schemes within s611A(1)(a) ICTA 1988) or a deferred annuity contract will be the value of those rights subject to the amount of the lump sum not exceeding the HMRC limit applying to those lump sum rights under the scheme or contract. For individuals with pre-1987 rights the HMRC limit should take account of lump sum retained benefits – see RPSM03302090.

Where the individual has uncrystallised lump sum rights in more than one pension scheme relating to the same employment the rights should be valued separately under each scheme ignoring the value of rights held under other schemes in respect of the same employment.

Protected rights and AVCs that were started after 7 April 1987 could not be commuted into a lump sum on 5 April 2006, so they cannot be included in the scheme lump sum entitlement. Similarly where scheme rules allow for the payment of a lump sum of an amount up to HMRC limit and there are insufficient funds in the scheme to provide this amount the scheme entitlement will be the amount of the available funds not the higher HMRC lump sum limit. RPSM03105529 gives an example.

A lump sum paid before 6 April 2006 that is deemed to crystallise on 6 April 2006 (where the member elected to defer entitlement of the pension – see RPSM09104542) should be included in the valuation of uncrystallised lump sum rights. The value to be included is the actual value of the lump sum to which the member became entitled before 6 April 2006. Where a lump sum was paid before 6 April 2006 that is not deemed to crystallise on 6 April 2006 it should not be included in the valuation of lump sum rights.

Step 2

Test the value of the lump sum rights against HMRC limits as they stood on 5 April 2006. The limit for these purposes is referred to in paragraph 26 of Schedule 36 Finance Act 2004, as the maximum permitted lump sum. RPSM03302060 to RPSM03302120 explain the calculation of the maximum permitted lump sum.