RPSM09105460 - Technical Pages: Member benefits: Lump sums: Other small lump sum payments: Payments to members already receiving an annuity from the scheme
[Reg 10 SI 2009/1171][s164(1)(f)]
When a member’s total benefit rights across any number of registered pension schemes only amount to a modest value, members might consider the option of having some or all of those rights paid out as a trivial commutation lump sum. In order for a lump sum to qualify as a trivial commutation lump sum, all of the conditions listed in RPSM09104970 must be met.
As with any closed list of requirements, some cases will come close to meeting all the conditions, but fail on a specific point. Normally such a failure will be the end of the matter, however regulations provide a conditional exception to the usual requirement that:
“the lump sum extinguishes the member’s entitlement to benefits under the registered pension scheme making the payment..”
An example of how this requirement could be failed arises where a lifetime annuity is already in payment to the member. If that annuity originated from a scheme under which the member still has a small prospective (uncrystallised) benefit right, perhaps a protected rights element, then the ongoing lifetime annuity payments will mean that the member’s entitlement under the scheme won’t be extinguished when the remaining rights are paid out. This remains so even where the annuity is being paid directly from an insurer to the member, as typically happens with a lifetime annuity that has been purchased for the member by the scheme. The tax rules look beyond the insurer in such a case to regard such annuity payments as coming from the originating registered pension scheme (see RPSM04104060). If the residual entitlement is too small to secure a further annuity, its payment as a lump sum would be unauthorised under the tax rules.
To resolve the difficulty this example raises, regulations provide that a small lump sum paid to the member will be an authorised member payment, providing:
- the payment is made on or after the 1st December 2009, and
- the payment is made from a registered pension scheme under which an annuity for the individual is set to continue (this can include an annuity that has been purchased by the scheme, in the member’s own name - so now appearing to be outside the scheme), and
- either - the individual is a member of at least one other registered pension scheme, in which case:
- a trivial commutation lump sum has been (or will be) paid in respect of one or more of the other schemes, and
- the ‘small lump sum’ is paid within the same commutation period (see RPSM09104950) as that in which all trivial commutation lump sum(s) for the member must be paid.
- or - if the individual is not a member of any other registered pension scheme, then:
- the individual has never received a trivial commutation lump sum payment from any scheme whatsoever, and
- the individual has never before received a ‘small lump sum’ under this provision from any scheme whatsoever, and
- the individual’s pension rights (both crystallised and un-crystallised - including any annuity for the member in the above example) are valued, immediately before the ‘small lump sum’ is paid, in the same way they would be valued if a trivial commutation payment lump sum was to be paid (see RPSM09104980 and RPSM09105030), and
- the value determined above does not exceed 1% of the standard lifetime allowance.
Although the lump sum payment in these circumstances is made by reference to some of the conditions for a trivial commutation lump sum, the lump sum itself is not a trivial commutation lump sum - rather it is a ‘small lump sum’.
There is an example of the above on RPSM09105465.
The way in which such ‘small lump sums’ are taxed is explained on page RPSM09105490.