RPSM09204020 - Member Pages: Member Benefits: Lump Sum Benefits: Basic Principles

Overview of Lump Sum Benefits

How much of my pension fund can I take in tax-free cash?

If you are a member of a registered pension scheme you will normally be able to take up to 25% of your benefits in the form of tax-free cash at or around the time your pension starts to be paid. There are also some other situations in which lump sums can be paid, these are all listed at RPSM09204030. However, not all lump sums will be tax-free.

I would like to use my lump sum payment to contribute to a registered pension scheme and get extra tax relief - can I do this?

Using your pension commencement lump sum to fund a contribution to a registered pension scheme is known as ‘recycling’ under the tax legislation for registered pension schemes. The tax legislation does not prevent you from using your pension commencement lump sum to make a contribution to a registered pension scheme. However, if you do use your pension commencement lump sum in this way, you may be liable for an unauthorised payments charge and an unauthorised payments surcharge and these tax charges might be based on the full amount of the lump sum. Whether there is a tax liability or not will depend on the circumstances.

If I recycle my pension commencement lump sum do I have to inform anyone?

Yes - you may have to pay penalties if your pension commencement lump sum is treated as an unauthorised payment and you do not tell the scheme administrator of the amount of the pension commencement lump sum within 30 days of the date on which the unauthorised payment is treated as being made. Even if you have only recycled part of your lump sum you must report the value of the amount that is treated as an unauthorised payment. Failure to inform the scheme administrator may result in a penalty of up to £300 plus further penalties of up to £60 a day that may continue until you make the report to the administrator. There could also be a penalty of up to £3,000 for a fraudulent or negligent report.

Also, you must account for the income tax you must pay in respect of the unauthorised payment on your individual self assessment tax return. If you do not normally receive a such tax return, you must notify your local HMRC office of your liability to income tax in respect of the unauthorised payment .

More guidance on recycling and the tax implications are on RPSM04104000.

I have heard that I can only have my tax-free cash when I retire from my current job - is this correct?

There is no requirement in the taxation legislation for your tax-free cash to be linked to your retirement although it will usually be linked to the commencement of your pension. But the rules that govern the running of your pension scheme may have conditions that are not included in the tax legislation. For example an employer that has set up a company pension scheme might decide that they do not want to pay any pension or lump sum benefits to an employee before they retire. You will need to contact your scheme administrator to find out about any particular conditions in the scheme rules.