RPSM09300110 - Scheme Administrator pages: Member benefits: Lump sum payments

Serious ill health lump sum

If a member is suffering from serious ill-health (as defined below) then, provided certain conditions are met, the scheme administrator may commute any pension entitlement that member holds under the scheme and pay the member their entire benefit entitlement under an arrangement as a lump sum. This is referred to in the legislation as a serious ill-health lump sum. There are five conditions that all must be met in order for a payment to be treated as a serious ill-health lump sum. These are as follows

• Before making the payment the scheme administrator has received written evidence from a registered medical practitioner (as defined below) confirming that the member is expected to live for less than one year.
• The member has not used up all of their lifetime allowance at the point the payment is made. RPSM09104630 explains the position where the payment, once made, actually breaches the 100% level of the member’s available lifetime allowance.
• The payment extinguishes the member’s entitlement to benefits under the arrangement (so all of the benefits under the arrangement must be commuted and paid as a serious ill-health lump sum).
• If the payment was made before 6 April 2011 the payment must be made before the member reaches their 75th birthday. From 6 April 2011 there is no upper age limit for making this type of payment. There is no minimum age limit on payment of a serious ill-health lump sum, and
• The payment is made in respect of what the legislation refers to as an uncrystallised arrangement (or arrangements) (see RPSM09104620).

If the payment is made on or after 6 April 2011 and the member is over 75 for the purposes of working out if

• the benefits are uncrystallised and
• the member has available lifetime allowance

you should ignore any BCE 5 or BCE 5B. Guidance on BCE5 and BCE 5B can be found at RPSM11104600.

There are no limits imposed on the payment of a serious ill-health lump sum. Under a money purchase arrangement the payment will be the funds held in that arrangement. With a defined benefits arrangement, it is for the scheme to attribute a capital value to the pension benefit entitlement being commuted.

If the lump sum is paid to a member before they are 75 there is no charge to income tax on payment of a serious ill-health lump sum, either on the individual or the scheme administrator (unless the lifetime allowance is an issue - see RPSM09104630).

If the serious ill-health lump sum is paid to a member age 75 or over the lump sum will be liable to tax. The scheme administrator will be liable to a 55% tax charge called the serious ill-health lump sum charge. The scheme administrator must tell HMRC about the tax due and pay the tax using the accounting for tax (AFT) procedure. Guidance on how and when to use the AFT return can be found at RPSM12301300.