RPSM09300160 - Scheme Administrator Pages: Member benefits: lump sum payments

Winding up lump sum

Where an occupational pension scheme is being wound up, and members’ benefits are commuted to lump sum payments, those payments may qualify as winding-up lump sums for tax purposes where the following conditions are met.

1. The employer of the member at the time of the payment

• is not making contributions in respect of the member under any other registered pension scheme, and
• undertakes to HM Revenue & Customs not to make such contributions during the period of one year from the date of the lump sum payment.

‘Employer’ here means any employer (at the time of the payment) of the member whose benefits are being commuted, where that employer has contributed to the scheme in respect of that member in the 5 years before the lump sum payment is made.

2. The payment

• must fully extinguish the member’s entitlement to benefits under the pension scheme
• must be made before the member’s 75th birthday
• must be made when the member still has some lifetime allowance available, and
• can only be treated as a winding-up lump sum to the extent that the amount paid does not exceed 1% of the standard lifetime allowance (any excess is an unauthorised payment).

The undertaking mentioned at 1. above should be in writing (there is no stock form for this) and confirm that the employer will meet the condition in paragraph 10(3)(c) of Schedule 29 to FA 2004. It should be sent to HMRC before the winding-up lump sum is paid at the following address;

Pension Schemes Services
HM Revenue & Customs
FitzRoy House
Castle Meadow Road
Nottingham
NG2 1BD.

One declaration per employer listing all the members in respect of whom the undertaking is made is sufficient.

Details of the tax position for a winding-up lump sum are at RPSM04101130.