RPSM09104270 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: General: Lump sum only schemes or arrangements

Lump sum only schemes and arrangements

The normal rules are that a lump sum payment can only be treated for tax purposes as a pension commencement lump sum where the member becomes entitled to actually receive a pension benefit from an arrangement under a registered pension scheme. The payment may be made up to 6 months before and 12 months after the entitlement to the pension benefit arises. The amount of such a lump sum is capped by reference to the level of the associated pension benefit entitlement arising under that arrangement or scheme, as well as by the member’s available lump sum allowance, with any excess being an unauthorised member payment.

So it is not normally possible for all of the funds or rights held under a registered pension scheme in respect of a member to be paid as a pension commencement lump sum. But there is an exception where the member held rights in a scheme to take benefits wholly in lump sum form at 5 April 2006, in certain circumstances (see RPSM03105640 and following pages).

The maximum authorised payment permissible will normally never be more than 25% of the accrued rights arising at that time under the scheme (the applicable amount). There are however exceptions to this where the transitional provisions apply (see RPSM03105000).

A registered pension scheme that paid a higher lump sum benefit before 6 April 2006 (such as schemes that provide lump sum benefits only) can no longer do this for members who joined on or after this date, without triggering an unauthorised member payment.

But the tax legislation does allow schemes some flexibility in paying different types of benefit from different arrangements in the same scheme. Changes introduced in FA 2005 allow a pension commencement lump sum to be paid from one arrangement based upon an arising pension entitlement under another of the member’s arrangements under the scheme. This means that a member can be given the choice of drawing their pension commencement lump sum from one source under a scheme, provided they have sufficient pension entitlement arising somewhere else in the scheme.

For example, if a scheme is set up in such a way as to separate the member’s additional contributions (AVCs) in a different arrangement to that of the main scheme benefit, the member may choose to take their permitted lump sum entitlement under the scheme from their AVC arrangement, rather than through commutation of their main scheme benefits. This lump sum can still qualify as a pension commencement lump sum.

RPSM09104280 gives an example of how the above flexibility may be applied.