RPSM09104282 – Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: General: Example of lump sum paid entirely from a defined benefit arrangement but based on pension entitlement arising mainly in a money purchase arrangement

Example of a pension commencement lump sum based on a pension entitlement arising under more than one arrangement in the same registered pension scheme

Adejumoke holds uncrystallised benefits under two arrangements in a registered pension scheme.

Under arrangement A, Adejumoke is entitled to a scheme pension of £10,000 per annum. A pension commencement lump sum may be paid by commuting part of this pension entitlement.

Arrangement B is a money purchase arrangement holding £100,000 of uncrystallised funds. The scheme rules state that these funds can only be used to purchase a lifetime annuity, although a lump sum may be provided by commutation.

The scheme rules give Adejumoke the option of taking her lump sum entitlement under arrangement B through arrangement A. This effectively allows her to aggregate her lump sum entitlements under both arrangements A and B, inside arrangement A.

Adejumoke draws a £75,903.60 pension commencement lump sum from arrangement A. The same arrangement also provides her with a residual scheme pension of £6,385.54 per year.

Arrangement B uses the full £100,000 fund to purchase a lifetime annuity of £4,761.90 per year fully indexed.

The lump sum paid under arrangement A is justified on the basis of Adejumoke’s total pension entitlements arising under the scheme.

The applicable amount based on her scheme pension entitlement arising under arrangement A is calculated on the basis outlined at RPSM09104400, as follows:

The applicable amount based on the lifetime annuity purchase under arrangement B is calculated on the basis outlined at RPSM09104370, namely one third of the annuity purchase price:

The total applicable amount is therefore the sum of the above two applicable amount calculations:

Adejumoke has not crystallised benefits up to the standard lifetime allowance so the available portion of the member’s lump sum allowance does not restrict the applicable amount of £75,903.60.

RPSM09104490 provides a method for calculating what might be the optimum lump sum.