RPSM09105480 - Technical Pages: Member benefits: Lump sums: Other commutation payments relating to trivial benefit rights: Payments relating to a particular employer from larger occupational or public service pension schemes

Payments relating to a particular employer from larger occupational or public service pension schemes

[Regulation 12 SI 2009/1171][s164(1)(f)]

If a member has a small amount of benefit rights in a registered pension scheme, and that scheme is either:

• a public service pension scheme, or
• an occupational pension scheme,

it is possible for those benefit rights to be paid as an authorised member payment in the form of a one-off lump sum to the member without the need for that lump sum to satisfy the test for a trivial commutation lump sum. (The requirements for a trivial commutation lump sum are set out in RPSM09104900 onwards.) The conditions that need to be met instead, for such a small lump sum to be an authorised member payment under Regulation 12 are that:

• the paying scheme has 50 or more members, and
• the payment is made on or after 1^st December 2009, and
• the payment is made to a member who:

• has reached the age of 60, but
• has not reached the age of 75, and

• the member is at ‘arm’s length’ from any sponsoring employer of:

• the scheme paying the small lump sum, and
• any other scheme that is both an occupational pension scheme and a registered pension scheme, which relates to the same employment as the paying scheme relates to (any ‘related scheme’), and

• the ‘small lump sum’ payment does not exceed £2,000, and
• the payment extinguishes the member’s entitlement to benefits under the paying scheme (where the member also has rights in a related scheme, those other rights do not have to be paid as a one-off lump sum as well), and
• no transfer of sums or assets from a registered pension scheme, or any other pension scheme, was made into the paying scheme in respect of the member in the 5 years before the day the small lump sum is paid, unless the transfer in was an ‘acceptable transfer’.
• in the 3 years before the day the small lump sum is to be paid out, there have been no recognised transfers-out relating to the member from the scheme paying the small lump sum, and
• the scheme can satisfy at least one of the following conditions

• the scheme was in existence on 1 July 2008, or
• where the payment is in respect of a defined benefits arrangement, the scheme holds more than half of the value of all its sums and assets for the purposes of the defined benefit arrangements (i.e. it is majority funded for defined benefit provision), or
• there are at least 20 members of the scheme, whose arrangements have an individual value greater than £2,000.

A member is said to be at ‘arm’s length’ from a sponsoring employer if that individual is:

• not a ‘controlling director’ of a sponsoring employer (in relation to either the paying scheme or any related scheme), or
• not ‘connected’ with a person who is a controlling director of a sponsoring employer (in relation to either the paying scheme or any related scheme)

A person is a ‘controlling director’ of a sponsoring employer if the person is a director of the company and is able to control 20% or more of the ordinary share capital of the company (as set out in section 417(5)(b) of the Income and Corporation Taxes Act 1988).

How a person is ‘connected’ with another person is set out in section 993 of the Income Tax Act 2007.

An ‘acceptable transfer’ is a transfer where all or part of the sums, assets and / or pension rights under a defined benefits arrangement or cash balance arrangement are transferred to form all or part of the assets of a defined benefits or cash balance arrangement under the paying scheme in respect of the member, in circumstances where:

• the transfer is made in connection with the winding up of the original pension scheme containing the cash balance or defined benefits arrangement, and the receiving cash balance or defined benefits arrangement relates to the same employment as the transferring arrangement that is being wound up, or
• where the transfer is made in connection with a relevant business transfer, or
• where the transfer is made as part of a retirement-benefit activities compliance exercise.

The three scenarios described above are explained more fully at RPSM03104091.

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