RPSM09104630 - Technical Pages: Member benefits: Lump sums: Serious ill-health lump sum: Lifetime allowance issues

If the lump sum was paid on or after 6 April 2011 you should first read RPSM09104660.

Size of the serious ill-health lump sum paid and lifetime allowance issues

There are no limits imposed on the payment of a serious ill-health lump sum. Under a money purchase arrangement the payment will be the funds held in that arrangement. With a defined benefits arrangement, it is for the scheme to attribute a capital value to the pension benefit entitlement being commuted.

The payment of the serious ill-health lump sum is a benefit crystallisation event for lifetime allowance purposes through BCE 6. So the more that is paid, the more that crystallises for lifetime allowance purposes.

Whilst the member must have available lifetime allowance in order for a serious ill-health lump sum to be paid, the level of lump sum paid is not limited by the level of available lifetime allowance that member actually has (as, for example, a pension commencement lump sum would be). Where the amount paid (or crystallising) exceeds the available lifetime allowance the excess simply creates a chargeable amount.

As the chargeable amount will arise here from a lump sum payment covered by BCE 6 (and so represents a lump sum amount) the lifetime allowance charge is due at the rate of 55%. The scheme administrator must account for the charge due, and is likely to deduct this charge before paying the serious ill-health lump sum to the member (so the payment will be net of the lifetime allowance charge due).