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
|[Paras 1-3, Sch 29][Para 34(2), Sch 10, FA 2005]
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
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
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.