RPSM09104510 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: Available portion

The available portion of the member’s lump sum allowance

The purpose of the lump sum allowance test is to provide a lifetime cap on the payment of the pension commencement lump sums the member may draw over their lifetime, in line with the lifetime allowance taxation cap. The lump sum allowance measure provides an indexed cap on the total tax-free lump sum payments that may be paid to an individual, from any registered pension scheme, of 25% of the standard lifetime allowance.

The measure at a given point is the standard lifetime allowance at the time of payment. So if the member chooses to stagger their benefits the starting maximum will increase year on year with the rise in the standard lifetime allowance.

Measure is always against the standard lifetime allowance

The above cap is always measured against the standard lifetime allowance, even where the individual is entitled to an enhanced lifetime allowance (unless the member is entitled to primary or enhanced protection – see RPSM09104230). So where the individual has crystallised benefits up to the level of the standard lifetime allowance, all future benefits crystallised will not be able to generate a pension commencement lump sum entitlement.

How the above is provided for in the legislation

The legislation provides for the calculation of the available portion of the member’s lump sum allowance in a given circumstance using a similar formula as used in the availability of lifetime allowance clause (s219). RPSM09104540 explains this for the record, but RPSM09104520 and RPSM09104530 explains how this may be established in practice.