RPSM03304090 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payments - tax-free lump sum over 25%: Lump sum more than available lifetime allowance

What if the member's lump sum is more than their available lifetime allowance?

Whether or not there is any or sufficient lifetime allowance left at the time entitlement to a lump sum arises depends on whether the member had already taken other pensions and lump sums prior to crystallising their protected lump sum.

If the member does have some available lifetime allowance but it is not enough to cover the whole lump sum, only part of it will be tax free. The part of the lump sum that is not covered by available lifetime allowance will be liable to the lifetime allowance charge and be taxed at 55%

Example

Sarah has protected tax-free lump sum benefits of £100,000, but her available personal lifetime allowance is only £50,000 at the time entitlement to her lump sum arises. The maximum lump sum payable tax-free from the scheme is £50,000. If the remaining £50,000 were to be paid as a lump sum although this would still be a pension commencement lump sum and it will taxable at 55% because it would be subject to the lifetime allowance charge.

What if the member has no available lifetime allowance when the lump sum is paid?

If a member has no available lifetime allowance when a lump sum is paid that lump sum cannot be a pension commencement lump sum. Members with transitionally protected lump sum rights must still satisfy the basic requirement that a pension commencement lump sum can only be paid when the member has available lifetime allowance.

Where a member has already used up their lifetime allowance any lump sum paid will be a lifetime allowance excess lump sum and thus liable to the lifetime allowance charge at 55% unless the member has enhanced protection. If the member has enhanced protection the lump sum will be an unauthorised member payment unless it is a stand-alonelump sum – see RPSM03304100.