RPSM09104220 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: General

The maximum level of pension commencement lump sum payable

The legislation lays down an upper limit on the level of pension commencement lump sum that can be paid under an arrangement at a given time. This is referred to as the ‘permitted maximum’.

A scheme can pay a member a higher lump sum, if they so wish. But any amount over the permitted maximum will not be a pension commencement lump sum. However, if the excess payment was paid with the intention of being a pension commencement lump sum and is covered in the Registered Pension Schemes (Authorised Payments) Regulations 2009 (SI 2009/1171), then it will be accepted as being an authorised payment. For the purposes of the tax rules, it will be treated as a pension commencement lump sum (see RPSM09108000 onwards). If it is not covered by the above regulations, it will be an unauthorised member payment and taxed accordingly.

Definition of permitted maximum

The permitted maximum is defined in the legislation as being the lower of two measures. These are

• the available portion of the member’s lump sum allowance - this is a measure equal to 25% of the member’s lifetime allowance available at that time, and is calculated on the basis that the member is entitled only to the standard lifetime allowance (see RPSM09104500), and
• the applicable amount - this represents a 25% measure of the capital value of the benefits coming into payment under the relevant arrangements under the scheme generating the lump sum payment, but ignoring any disqualifying pension credit held and, where a money purchase arrangement is involved, ignoring any unsecured pension funds that have already been designated. See RPSM09104310.However, where a member has received a lump sum payment in anticipation of the entitlement to their scheme pension, lifetime annuity or income drawdown arising within 6 months, but has died before that entitlement has arisen, the lump sum payment can be treated as a pension commencement lump sum to the extent that it does not exceed the amount of the available portion of the member’s lump sum allowance immediately before their death. The applicable amount calculation does not come into play here.

In the vast majority of cases the lifetime allowance factor will not be an issue, so the maximum will be the applicable amount and a straight 25% calculation.

RPSM09104230 deals with the various transitional issues that may affect the above limit.