RPSM03303060 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payment - enhanced protection: Lump sums more than £375,000

Payment of protected lump sums of more than £375,000

Evidence of protection of lump sums of more than £375,000

When individuals notify HMRC of their pension rights as at 5 April 2006, they will also give details of their lump sum rights at that date. HMRC will then issue a certificate to the member confirming enhanced protection has been notified.

If the individual’s crystallised and uncrystallised lump sum rights exceeded £375,000 on 5 April 2006 this certificate will also show the percentage of the value of total benefits coming into payment that can be paid as a pension commencement lump sum.

If there is a nil value (0%) on the certificate, this means that no tax-free lump sum is payable.

If there is no information about lump sums on the certificate, this means that the individual has no protected lump sum rights under enhanced protection (because his lump sum rights did not exceed £375,000 on 5 April 2006).

If on 5 April 2006 an individual could have taken all their benefits from all their pension schemes (that become registered pension schemes on 6 April 2006) as a tax free lump sum the certificate will show 100%. This means that if certain conditions are met all the member’s rights under the scheme may be paid as a tax free lump sum. This type of lump sum is a stand-alone lump sum and RPSM03303061 gives more information on the payment conditions.

You may also wish to seek confirmation from the member that the certificate is still valid and follow the instructions at RPSM03303040.

Enhanced protection valid

You may pay a tax-free lump sum from the scheme provided the percentage of the benefits derived by the following methods does not exceed the percentage shown on the HMRC certificate. Please note that where the lump sum is paid partly from disqualifying pension credit rights or from sums or assets previously designated for the payment of an unsecured pension, the value of the residual pension must be reduced by the value of the disqualifying or designated rights.

The lump sum paid is divided by the lump sum paid plus the value of the residual pension. The result is then multiplied by 100 and expressed as a percentage. The value of the residual pension is as follows

• where it is a lifetime annuity, the sums and the market value of the assets used to purchase the annuity,
• where it is an unsecured pension, the sums and the market value of the assets designated to provide the pension,
• where it is a scheme pension, provided under a defined benefits arrangement the annual amount of the initial pension multiplied by 20 (or another factor where this has been agreed by HMRC).

Where it is a scheme pension provided under a money purchase arrangement the scheme pension purchase price.

Where the certificate of enhanced protection is not produced or it is not yet available

If the member does not provide you with an HMRC certificate as evidence of the lump sum payable, you will need to consider whether or not you should pay out any lump sum benefits in excess of those usually permitted under paragraphs 1 to 3 of Schedule 29 FA 2004 - see RPSM09104200 (unless the member has lump sum rights of more than 25% in the scheme). If you do, part or all of the lump sum payment may be an unauthorised member payment and the member could be liable to an unauthorised payments charge. The scheme administrator may also be liable to a scheme sanction tax charge - see RPSM04104000. If the payment is more than 25% of scheme funds, the scheme's registration may also be withdrawn.