RPSM11102055 - Technical Pages: Lifetime allowance: When you test for the lifetime allowance: What does “becoming entitled” to a lump sum mean?

What is meant by “becoming entitled” to a lump sum?

[s166(2), s216, paras 1-3A Sch 29]

Pension commencement lump sum

BCE 6 occurs when the entitlement to the pension commencement lump sum arises. The lifetime allowance test is carried out using the lifetime allowance at that point of entitlement, so it is important to understand when that point arises:

For a pension commencement lump sum, the entitlement is normally deemed to arise immediately before the entitlement to the linked scheme pension / unsecured pension / lifetime annuity (see RPSM11102050), so that two BCEs will always be linked. This date may well be different from the date that the lump sum was actually paid, as the lump sum can be paid up to 6 months before or 12 months after the entitlement to it arises.

There are however special rules about the date of entitlement, which apply where a lump sum has been paid in anticipation of entitlement to any of the above kinds of pension arising within the following 6 months, but the member dies before that entitlement actually arises. In such circumstances, the payment may nonetheless be treated as a pension commencement lump sum and entitlement to the lump sum is deemed to have arisen immediately before the member’s death. The lifetime allowance test would then be carried out using the lifetime allowance at that time. The entitlement to the amount of lump sum arising immediately before the member’s death is regarded as using-up lifetime allowance before the deemed occurrence of BCE7s arising from the payment of lump sum death benefits – see RPSM11104820.

Other types of lump sum

With any other type of authorised lump sum (apart from death benefits, see RPSM11104820), the lifetime allowance test is made on the date the member acquires an actual entitlement to the lump sum. For the purposes of the legislation, the member only becomes ‘entitled’ to a lump sum at the point when they first obtain an ‘actual right’ to receive it. This ‘actual right’ has to be distinguished from their ‘prospective right’. An ‘actual right’ is when a member has the right to a lump sum without having to fulfil any further conditions or take any further actions, e.g.

• having to agree to or authorise the payment of a lump sum, or
• having to obtain an employer’s or scheme trustee/ scheme administrator’s agreement or co-operation to a lump sum payment.

The lifetime allowance test is carried out using the lifetime allowance at the date of entitlement, which may be different from the date of payment.