RPSM09105465 - Technical Pages: Member benefits: Lump sums: Other small lump sum payments: Example where member already receiving an annuity from the scheme

Example where member already receiving an annuity from the scheme

 

[Reg 10 SI 2009/1171][s164(1)(f)]

Anne had saved for a pension in a money purchase arrangement where she had both protected rights and non-protected rights. In 2005 she crystallised the entirety of the non-protected rights element, to provide a level annuity of £300 pa.

The other element which held the protected rights could not be drawn until Anne reached age 60 on 2nd February 2010.

Ann wants to use the remaining Protected Rights element as soon as possible (from 2nd February 2010). The value of that account is quite small when it comes to buying a pension annuity so the scheme provider wants to see if the tax rules would allow it to be cashed out in its entirety as a small lump sum.

Ann had never been in any other registered pension schemes and only had savings under this one arrangement. The provider has ticked almost all the conditions required for the circumstances listed in which such a small lump sum payment can be made (timing and other rights) as listed on RPSM09105460, but now needs to check the amount will be OK. To check the amount is OK the scheme provider has to combine the value of both Anne’s crystallised and uncrystallised rights immediately before the payment is to occur.

Anne’s uncrystallised rights:

These are all held in an other money purchase arrangement, so according to RPSM04104690 one must determine the total value of assets and amount of sums of money held in Anne’s remaining protected rights account immediately before payment would occur. Let’s say that comes to £5,000.

Anne’s crystallised rights:

Being level, the annual rate of pension measured on the 5th of April 2006 was unchanged from when it started, i.e. it’s still £300 pa. This is multiplied by 25 to arrive at the value for trivial commutation purposes on that date:
£300 x 25 = £7,500
This value as at the 5th of April 2006 then has to be adjusted to determine the equivalent value of those crystallised rights on the 2nd February 2010 (immediately before the payment is to be made). The adjustment uses this formula:
SLAN / FSLA (see RPSM09105010 for more on this formula)

Where FSLA (first standard lifetime allowance) = £1.5m

And the SLAN (standard lifetime allowance on the nominated day 2009/10) = £1.75m (RPSM11101010)

(1.75 / 1.5) x £7,500 = £8,750

So the combined value of the crystallised and uncrystallised rights is:

£8,750 + £5,000 = £13,750

This is below the commutation limit (RPSM09104910) for 2009/10 of £17,500 so the tax rules do allow Anne to draw the residual £5,000 as a small lump sum on 2nd February 2010, even though such payment would not extinguish all her rights from the scheme because the annuity will continue.


 

Glossary (RPSM20000000)

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