RPSM04101070 - Technical Pages: Taxation: Authorised member payments: Tax free lump sums

Authorised lump sums that are tax exempt

[s636A(1) ITEPA 2003][Article 25C(2) The Taxation of Pension Schemes (Transitional Provisions) Order 2006 – SI 2006/572 as amended by The Taxation of Pension Schemes (Transitional Provisions) (Amendment No.2) Order 2006 – SI 2006/2004]

The following lump sums are not liable to income tax

• a pension commencement lump sum, see RPSM09104100,
• a stand-alone lump sum (see RPSM03105155, RPSM03105202 and RPSM03105640),
• a serious ill health lump sum, see RPSM09104600,
• a defined benefits lump sum death benefit, see RPSM10105110,
• an uncrystallised funds lump sum death benefit, see RPSM10105200,
• a refund of excess contributions lump sum see RPSM09104800,
• a transfer lump sum death benefit. see RPSM10105330,
• a life cover lump sum see RPSM10105440, and
• a pension guarantee payment see RPSM10105550.

The treatment of an authorised lump sum as tax exempt does not prevent the application of the lifetime allowance charge in the case of

• a serious ill health lump sum,
• a defined benefits lump sum death benefit,
• an uncrystallised funds lump sum death benefit,
• a stand-alone lump sum, or
• a pension commencement lump sum (if paid under scheme specific lump sum protection or protection of lump sum rights over £375,000 with primary protection). In these circumstances it may be paid where the member does not have enough available lifetime allowance (see RPSM03105620 and RPSM03105170).

Any amount paid over the lifetime allowance will be liable to the lifetime allowance charge.

A transfer lump sum death benefit may be subject to the lifetime allowance of the recipient, when the individual begins to draw their benefits.

A charity lump sum death benefit is not specifically excluded from liability to income tax. However, providing the charity receiving the payment uses the lump sum for charitable purposes, no tax charge will arise on the payment.