RPSM03303061 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payment - enhanced protection: Stand-alone lump sum

Payment of stand-alone lump sums with enhanced protection

Where on 5 April 2006 all an individual uncrystallised rights under all their pension schemes (that become registered pension schemes on 6 April 2006) could have be taken as a tax free lump sum a stand-alone lump sum may be paid. The member’s certificate of protection will show a protected lump sum percentage of 100%.

A stand-alone lump sum is the payment of all the member’s uncrystallised rights under the scheme as a lump sum that is a single benefit crystallisation event.

A stand-alone lump sum can be paid once the member has reached the normal minimum pension age of 55 (50 until 5 April 2010) or any earlier protected pension age. The lump sum can also be paid earlier if the member is taking benefits due to ill health - see RPSM08300080.

A stand alone lump sum cannot be paid if any of the individual’s registered pension schemes has received a transfer in respect of the member from a non registered pension scheme.

Before 6 April 2011 a stand-alone lump sum could not be paid to someone aged 75 or over.

There is no set upper limit on the amount of stand-alone lump sum whilst the member has valid enhanced protection.

Money purchase arrangements can pay a stand-alone lump sum which includes the full investment return on the value of the lump sum rights as at 5 April 2006 even though this is more than the 5 April 2006 value indexed in line with the standard lifetime allowance.

Defined benefits or cash balance arrangements can pay a stand-alone lump sum up to the amount of the appropriate limit. (RPSM03104525 explains what the appropriate limit is.)

The payment of a stand-alone lump sum is a benefit crystallisation event (BCE 6) so it is potentially liable to the lifetime allowance charge. Apart from the lifetime allowance charge a stand-alone lump sum is not liable to income tax. So whilst the member has valid enhanced protection the lump sum is tax-free.

After paying the stand-alone lump sum you must provide the member with a statement telling them what percentage of the standard lifetime allowance has been used up by the benefit crystallisation event (see RPSM03303080).

If the member does not have enhanced protection different payment conditions and rules apply to stand-alone lump sums - see RPSM03105155 and RPSM03105640.