RPSM09105420 - Technical Pages: Member benefits: Lump sums: Other small lump sum payments: Small lump sum payments made after transfer out

The tax rules for registered pension schemes provide for recognised transfers to be classed as authorised member payments. Broadly speaking, a recognised transfer occurs whenever sums or assets (marking a member’s benefit rights) are moved from one registered pension scheme to another, or to a qualifying recognised overseas pension scheme. Pages RPSM14100000 onwards, give more details about recognised transfers.

Transferring all of a member’s rights out of a given scheme, will usually end that scheme’s involvement with the member. However, there are exceptions, and sometimes these are unexpected. It may happen for example, that a further payment is made into the originating pension scheme at a later date; a payment which still relates to the member who previously transferred out. An example of this would be where dividends or other structured payments, are received from an investment that had related to the transferring member. Late payments might also be received from an insurance company, say, in the case of unit pricing problems relating to a policy investment under the scheme, or from a fund manager. More simply perhaps, the receipt of a payment may have been overlooked. No doubt other scenarios, where late payments are made into a member’s arrangement, are possible.

A scheme might also find that it holds extra rights for the member without there actually being a payment-in. There could simply be some rights that, for whatever reason, had not been correctly identified at the time of the transfer. An example might be where there had been a valuation error in a money purchase arrangement, which had caused an investment that provided part of the transfer value to be undervalued. A later correction in the valuation could result in there being further rights in the scheme relating to the member who had transferred out.

Many of the above kinds of situation, which cause there to be further member rights under an arrangement in the scheme, will be classed under the tax rules as a ‘relevant accretion’. The scheme in turn, is likely to have to pay out those rights. However, where the value of the rights is small, schemes may face practical difficulties making payments that would be authorised under the tax rules. The value may be too small to buy a lifetime annuity or fund a scheme pension. A further transfer payment to the same destination to which the earlier recognised transfer was made won’t always be possible. The reason could be as simple as the other pension scheme not being willing to accept the further payment. Or the member might have already had benefits paid out from the scheme that received the earlier transfer, so there is nothing to add a further transfer to. Problematic scenarios could also arise in some cases where the member has died by the time the further rights are identified.

Where a scheme holds such further small value rights, the tax rules provide a possible solution: the scheme may pay a one-off small lump sum to the member (or in respect of the member, if the member has since died). Such a ‘small lump sum’ will be an authorised member payment providing the following conditions are met (subject to the proviso at the end). The conditions are:

• there has been a recognised transfer out of a registered pension scheme (the originating scheme) in respect of a member (the transferred member), and
• the recognised transfer was to another registered pension scheme or to a qualifying recognised overseas pension scheme, and
• after that transfer, there was a ‘relevant accretion’ in the scheme for the member (whether still living or dead), meaning:
• a payment is made into the originating scheme in respect of the member for whom the transfer-out was made (this will typically apply to money purchase benefit rights), and / or
• there is a further allocation of value to the “member’s arrangement” above the value which the administrator had expected the sums and assets held for the purposes of that arrangement to be worth when the transfer-out was made - as might occur for example, with a corrective revaluation of sums and assets (again, this will typically apply to money purchase benefit rights), and / or
• the scheme administrator becomes aware for the first time, of the member’s entitlement to a further benefit, in circumstances where they could not reasonably have been expected to be aware of it at the time of the transfer out - for example following a court judgment relating to a defined benefits arrangement, or as might occur when implementing revised legal conclusions on the application of overriding sex equalisation legislation where the retrospective effect may lead to small additions to original benefit entitlements,
• and a payment is then made from the originating scheme to the transferred member (or in respect of the transferred member if that person has since died) (the payment out), and
• the payment extinguishes the transferred member’s entitlement to benefits under the originating scheme, and
• the payment does not exceed £2,000 - and
• the payment does not exceed the value of the ‘relevant accretion’, where the value is:
• the amount of the payment in, or
• the amount of the increase in the value of the of the sums and assets held for the purposes of the arrangement receiving the further allocation of value, or
• the value of the further benefit to which the administrator becomes aware the member is entitled,

• the payment is made between the 1^st December 2009 and the later of:
• 1^st June 2010, and
• 6 months after the ’relevant accretion’ occurred.

However, a payment made in these circumstances will only be an authorised member payment if the ’relevant accretion’, was:

• not a contribution into the scheme (other than a contribution made by HM Revenue and Customs that was made under section 42A(3) or 43 of the Pension Schemes Act 1993 or section 38A(3) or 39 of the Pension Schemes (Northern Ireland) Act 1993 - contracted-out rebates and minimum contributions), and
• not a recognised transfer-in, nor any other transfer into the pension scheme of any sums or assets held for the purposes of, or representing accrued rights under another pension scheme (including from a scheme that is not a registered pension scheme).

The way in which such a ‘small lump sum’ is taxed is explained in RPSM09105490.