If a
pension commencement lump sum is paid under the
normal (unprotected lump sums) rules it will be tax free. Because
of the way the limit on pension commencement lump sums normally
works it is not possible to pay a pension commencement lump sum of
more than an individual’s available
lifetime allowance.
However with primary protection and lump sums of more than
£375,000 it is possible for a lump sum to be a pension
commencement lump sum but part (not all) of it can be liable to the
lifetime allowance charge. This happens where the
individual has available lifetime allowance but not enough to cover
the amount of the lump sum.
Example
Jane has primary protection for her pension rights, and her lump sum rights on 5 April 2006 exceeded £375,000. She has already taken some benefits after 5 April 2006 under primary protection.
Her remaining rights are in a money purchase arrangement, which are valued at £1 million. Her available protected pension rights are valued at £600,000, which means her available personal lifetime allowance is £600,000. The amount of protected lump sum is £700,000 - her protected lump sum rights are greater than her available personal lifetime allowance.
Jane takes a pension commencement lump sum of £700,000, using up all of her available lifetime allowance. She takes the balance of the £1 million (£300,000), as a lifetime annuity. £600,000 of her pension commencement lump sum is free of income tax, but £100,000 is liable to the lifetime allowance charge under section 214 Finance Act 2004. So she receives £600,000 tax-free and a further lump sum of £45,000 after tax under the lifetime allowance charge.
Jane cannot take all of her protected lump sum amount tax-free because the maximum amount of pension commencement lump sum exceeds the amount of her available lifetime allowance.
Because Jane took too little lump sum when she took her earlier benefits, the full total lump sum available under protection was not paid entirely free of income tax.
The same position applies to a stand-alone lump sum. If the member does not have enough available lifetime allowance the part of the lump sum over the available lifetime allowance will be liable to the lifetime allowance charge. So the amount of the lump sum up to the member’s available lifetime allowance will be paid tax-free and the excess will be taxable at 55%.
| Glossary ( RPSM20000000) |
