RPSM09104284 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: General: Example of lump sum paid primarily from a money purchase arrangement and partially from a defined benefit arrangement but based entirely on pension entitlement arising in the defined benefit arrangement

Example of a pension commencement lump based partially on a pension entitlement arising under another arrangement in the same registered pension scheme

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

A is a money purchase arrangement worth £50,000.

B is a defined benefit arrangement promising Philip a scheme pension of £10,000 pa. It is possible to commute pension under this arrangement into a cash lump sum.

Philip chooses to take his benefits as follows:

The money purchase fund is used up providing a pension commencement lump sum of £50,000; and

• part of the defined benefit scheme pension is also commuted to give a pension commencement lump sum of £10,000
• the remainder of the defined benefit rights provide a residual scheme pension of £9,000 p.a.

The total pension commencement lump sum of £60,000 is justified by the £9,000 p.a scheme pension on the basis of the usual formula for scheme pensions under defined benefit arrangements (as outlined at RPSM09104400):

Comment:

In this example, the pension commencement lump sum is allowed to exceed the amount that would have been allowed had the two arrangements been in separate schemes. In that case, the total of the two pension commencement lump sum from each scheme would have been £52,500 on the following basis:

• £12,500 from the money purchase scheme (1/3 x the residual amount of the £37,500 used to buy pension) and
• £40,000 from the defined benefit scheme (with a post commutation pension of £6,000). This is calculated on the basis described at RPSM09104430 and cross checks with the test at RPSM09104400:

£40,000 = [£40,000 + (20x£6,000)] /4