RPSM03305052 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payments - primary protection: Lump sum more than £375,000
How protection of lump sums of more than £375,000 works
When individuals notify HMRC of primary protection they will be asked if they have lump sum rights of more than £375,000 and if so the value of their uncrystallised lump sum rights. HMRC will then issue a certificate to the member confirming primary protection.
If the individual’s crystallised and uncrystallised lump sum rights exceeded £375,000 on 5 April 2006 the HMRC certificate of primary protection will show the amount that can be paid as a pension commencement lump sum or a stand-alone lump sum. (RPSM03105155 gives more information on when a stand-alone lump sum can be paid if the member has primary protection.)
To pay lump sums of more than £375,000 the scheme administrator will need details of the member’s primary protection certificate.
The maximum pension commencement lump sum or stand-alone lump sum that an arrangement can pay is
VULSR - APCLS
Where VULSR = the value of the uncrystallised lump sum rights on 5 April 2006. This is the amount that will be shown on the HMRC certificate of primary protection. This value will be increased in line with the increase in the standard lifetime allowance from 6 April 2006.
APCLS = the total value of any pension commencement lump sums and/or stand-alone lump sums that have previously been taken. The value of each lump sum will be increased in line with the increase in the standard lifetime allowance from the tax year in which it was paid.
Example
David has primary protection. On 5 April 2006 he had total lump sum rights of £450,000 of which £300,000 were uncrystallised lump sum rights. As a result David’s certificate of primary protection shows a protected lump sum of £300,000.
David’s uncrystallised pension rights are split between a money purchase arrangement and a defined benefits arrangement.
In 2007/08 when the standard lifetime allowance is £1.6 million David take benefits from his money purchase arrangement which has a value of £250,000. He takes the entire amount as a stand-alone lump sum. He can do this as the amount is less than his protected lump sum.
In 2010/11 when the standard lifetime allowance is £1.8 million David takes benefits from his defined benefits arrangement. The maximum lump sum that can be paid is
Value of protected LS indexed from 5/4/06 - value of previous LS indexed from 2007
(£300,000 x 1.8/1.5) - (250,000 x 1.8/1.6)
= £78,750
David is paid a pension commencement lump sum of £78,750 and the remainder of the funds in the arrangement is used to provide a scheme pension.
Further examples can be found at RPSM03105150 and RPSM03105156 to RPSM03105180.
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