RPSM03304070 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payments - tax-free lump sum over 25%
How is the lump sum calculated?
The maximum amount of lump sum which can be paid from the scheme as a pension commencement lump sum is calculated in two stages.
First take the value of the member’s protected tax-free lump sum rights under the scheme as at 5 April 2006 and index those rights in line with any increases in the amount of the standard lifetime allowance between 6 April 2006 and the tax year in which the benefits are being crystallised.
Second, the member may be entitled to an additional lump sum amount (ALSA). This amount is found by using the formula
LS + AC - (VUR X CSLA/FSLA) |
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LS = the amount of pension commencement lump sum actually paid.
AC = the amount actually crystallised by becoming entitled to a pension in connection with which the pension commencement lump sum is paid, or the amount of the trivial lump sum paid in accordance with RPSM03105516). Where a scheme pension is paid from a money purchase arrangement AC will be the scheme pension purchase price, i.e. the value of the sums and assets made available to provide the scheme pension.
VUR = the value of the individual’s uncrystallised rights under the scheme on 5 April 2006.
CSLA = the standard lifetime allowance when benefit entitlement arises.
FSLA = £1.5 million.
These amounts when added together are the maximum amount of lump sum that can be paid from a scheme as a pension commencement lump sum.
Example
On 5 April 2006, Jack has protected tax-free lump sum rights of £100,000 and his total pension rights are valued at £200,000. The standard lifetime allowance is £1.5 million in 2006-2007.
He continues as an active member of the scheme and on 12 June 2010 he takes all of his benefits from the scheme. His total pension rights from the scheme have now increased to £280,000, and the standard lifetime allowance has increased by 20% to £1.8 million.
The scheme may pay a protected tax-free lump sum of up to £130,000 being made up of £120,000 in respect of the revalued 5 April 2006 rights and £10,000 in respect of ALSA.
The 5 April 2006 lump sum rights are valued as £100,000 x 1.8/1.5 million = £120,000.
The portion of the lump sum in respect of ALSA is calculated by taking 25% of the difference between the total value of the benefits on 12 June 2010 and the value of the 5 April 2006 rights increased in line with the standard lifetime allowance. That is
£280,000 - (£200,000 x [£1.8 million ÷ £1.5 million]) = £40,000.
25% of £40,000 is £10,000.
The maximum total lump sum payable as a pension commencement lump sum from the scheme on 12 June 2010 is therefore £130,000. If the member has sufficient available lifetime allowance to cover the whole lump sum, i.e. if Jack had £130,000 or more available lifetime allowance, the lump sum will be tax free. However, the amount actually paid may be a lesser amount depending on the scheme rules.
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Glossary (RPSM20000000) |
