RPSM03304010 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payments - tax-free lump sum over 25%: Protection available

I am a scheme administrator of a scheme which currently provides lump sum benefits in excess of 25% of the fund. Are there any rules for protecting these benefits against tax charges?

Yes. The rules of a retirement benefits scheme or a deferred annuity contract, as they applied up to 5 April 2006, may have allowed members to take tax-free lump sum benefits greater than the 25% limit under the post 5 April 2006 rules.

If members have uncrystallised tax-free lump sum rights of more than 25% of their uncrystallised rights in the scheme as at 5 April 2006, the scheme may honour those rights without incurring an unauthorised member payment charge subject to the following conditions

• the member’s benefits when paid are paid from the same registered pension scheme in which the rights were held on 5 April 2006, or from a scheme to which those rights were transferred under a block transfer - see RPSM03105521 and RPSM03105523 
• this scheme before 6 April 2006 was a retirement benefits scheme or a deferred annuity contract
• the member must become entitled to all of their uncrystallised pension and lump sum rights under the scheme on the same day. Alternatively the pension commencement lump sum is paid in connection with a special type of trivial lump sum as described at RPSM03105516. (Please note this trivial lump sum is not the normal trivial commutation lump sum.)
• the member does not have total lump sum rights of more than £375,000 with either primary or enhanced protection - see RPSM03304040.

Schemes which were not retirement benefits schemes or deferred annuity contracts before 6 April 2006

If you are the scheme administrator of a personal pension scheme (including a stakeholder pension scheme) the maximum lump sum members were allowed to take free of tax before 6 April 2006 was limited to 25% of the fund value. Therefore, this type of protection is not needed for such members. The tax-free cash sum on 5 April 2006 under a retirement annuity contract is deemed to be 25% of the fund value, irrespective of annuity rates, so this type of protection does not apply to individuals with these contracts - see RPSM03302040.