RPSM09104310 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: The applicable amount

The applicable amount (the 25% rule)

The basic rule is that 25% of the total lifetime allowance crystallisation value of the pension/ lump sum entitlements arising at a particular time in an arrangement or arrangements under a registered pension scheme may be paid as a pension commencement lump sum, provided these entitlements do not fall into certain excluded categories.

The payment may be made up to 6 months before and 12 months after the member becomes entitled to it. However, it will only become a pension commencement lump sum and therefore an authorised payment when the entitlement arises. For the purposes of valuation against the lifetime allowance, the amount crystallised by the pension commencement lump sum is the amount which was paid. The maximum level of pension commencement lump sum payable is capped by reference to the capital value of the pension benefit (or benefits) the lump sum is linked to. The lump sum must be linked to one or more arising entitlements to

• income withdrawal ( unsecured pension) (see RPSM09104340 and RPSM09104250, which also explains why we are looking at an entitlement to income withdrawal and not a short-term annuity),
• a lifetime annuity (see RPSM09104370), or
• a scheme pension (see RPSM09104400).

The calculation here is referred to in the legislation as the applicable amount.

As the three relevant pension entitlements are different in nature the legislation lays down how the applicable amount should be calculated for each of the three pension entitlements.

For example, with a scheme pension, unlike purchasing a lifetime annuity or income withdrawal entitlement, there is not necessarily going to be an underlying purchase price or fund value to which the calculation can be linked. So the method of calculating the applicable amount is very different from the other two methods of calculation. The pages listed above explain how the applicable amount is calculated in the above three circumstances and give examples.

Where the lump sum is being paid from a different arrangement to that in which the entitlement to the relevant pension has arisen (whether in whole or in part), when calculating the applicable amount account should be taken, of any other pension commencement lump sum being paid from the same arrangement as the relevant pension that is linked to that pension entitlement.