RPSM09104160 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Overview: Excluded lump sums

An excluded lump sum for pension commencement lump sum purposes

A lump sum payment is an excluded lump sum if

• it is paid in connection to an arising entitlement to a scheme pension, which is a bridging pension that will be reduced or stopped at a time not earlier than when the member reaches the age of 60 and not later than when the member reaches the age of 65 – see RPSM09101540, and
• the sole or main purpose of making provision for such a bridging pension was to increase the member’s potential entitlement to a pension commencement lump sum.

Such an excluded lump sum will not be a pension commencement lump sum but will be an unauthorised member payment, to the extent that the individual’s lifetime allowance is not exhausted. RPSM04104020 explains how an unauthorised member payment is taxed. Any payment made when the member’s available lifetime allowance has been exhausted will represent a lifetime allowance excess lump sum (liable to a 55% lifetime allowance charge).

The maximum pension commencement lump sum that may be paid where a scheme pension is being provided is directly linked to the level of pension in payment in the first 12 months the entitlement arises (see RPSM09104400). So the higher the starting value the higher the level of pension commencement lump sum that can be paid. The excluded lump sum rule is an anti-avoidance rule to prevent individuals getting higher tax free lump sums by setting up a bridging pension (or pensions) to allow the initial pension level to be inflated merely to provide a higher maximum pension commencement lump sum.