RPSM09204060 - Member Pages: Member Benefits: Lump Sum Benefits: Authorised Lump Sum payments and the Lifetime Allowance

Authorised Lump Sum Benefits and the Lifetime Allowance

What is my lifetime allowance?

Your lifetime allowance is the cash value of the maximum amount of benefit that you can receive from a registered pension scheme without having to pay a special tax charge called the lifetime allowance charge. However not all payments count towards the lifetime allowance. The lifetime allowance is initially set at £1,500,000. More information about the lifetime allowance is available at RPSM11200000.

If I receive a lump sum benefit will it count towards my lifetime allowance?

The following authorised lump sum payments trigger a lifetime allowance test

• a pension commencement lump sum,
• a serious ill-health lump sum, and
• a lifetime allowance excess lump sum.

How will I know if a lump sum payment takes me over my lifetime allowance?

Before a pension commencement lump sum is paid the scheme administrator will establish whether you have sufficient lifetime allowance available to cover the lump sum payment (and any other benefit coming into payment under the scheme at the same time).

What happens with the excess lump sum above my lifetime allowance?

Where the excess arises following the payment of a pension commencement lump sum, the extra portion can be paid as a lifetime allowance excess lump sum - which in principle can only be paid where there is no available lifetime allowance remaining. This excess lump sum becomes taxable using a special lifetime allowance charge. Likewise, if a member wanted to draw a further lump sum at a later date, once there was no available lifetime allowance remaining, then that entire later lump sum could be a taxable lifetime allowance excess lump sum.

On the other hand, if the underlying payment was a serious ill-health lump sum, the individual would need to have some available lifetime allowance for the payment to be made at all. The size of the serious ill-health lump sum payment however, is not limited by the level of lifetime allowance actually available (see RPSM09104630.

Are there any lump sum payments that do not count towards my lifetime allowance?

The following lump sum payments do not trigger a lifetime allowance test at all, and the amount paid will not use up any of the member’s lifetime allowance.

• a refund of excess contributions lump sum,
• a trivial commutation lump sum,
• a short service refund lump sum, and
• a winding up lump sum.

A trivial commutation lump sum or a winding-up lump sum may, however, only be paid where the member has not exhausted their entire lifetime allowance. The member must have available lifetime allowance. This restriction does not apply to the payment of a shortservice refund lump sum or refund of excess contribution lump sum.

For the avoidance of doubt, where the member has used up 100% of their lifetime allowance and a short service refund lump sum or refund of excess contribution lump sum is paid, those payments will not be subject to a lifetime allowance charge.