RPSM03105515 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection: How it works

How scheme specific protection of lump sum rights of more than 25% works

[Paras 31 - 34 Sch 36][Article 25 - 25D & 23C The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572]

The value of an individual’s uncrystallised lump sum rights in a scheme on 5 April 2006 is identified. The legislation refers to these rights as VULSR.

The value of an individual’s uncrystallised pension rights in a scheme on 5 April 2006 is identified. The legislation refers to these rights as VUR.

RPSM03105530 to RPSM03105570 explain how VULSR and VUR are valued.

Where VULSR/VUR x 100 is more than 25 the legislation for the maximum pension commencement lump sum is rewritten to allow a scheme to pay a lump sum of more than 25%. Broadly the scheme will be able to pay a lump sum of the value of the allowable lump sum rights that were in the scheme on 5 April 2006 (revalued in line with the increase in the standard lifetime allowance or, from 6 April 2012, revalued by increasing the value on 5 April 2006 by 20% for such time as the standard lifetime allowance is not more than £1.8 million) plus an additional lump sum amount (ALSA). Note that the formula for ALSA is different for pension commencement lump sums entitlements arising before 6 April 2012 and those arising on or after that date. RPSM03105580 gives more details.

Where on 5 April 2006 the individual was entitled to have all their benefits under all schemes relating to the same employment paid as a lump sum and they have had no relevant benefit accrual under the scheme (see RPSM03104080) all benefits may still be paid as a lump sum as long as certain conditions are met. This will not be a pension commencement lump sum but a stand-alone lump sum. RPSM03105640 explains when a stand-alone lump sum may be paid. If the conditions for a stand-alone lump sum are not met an individual may still qualify for a protected pension commencement lump sum.

Important points to note for pension commencement lump sum protection

This form of protection is specific to a particular pension scheme. If a transfer is made from the protected scheme lump sum protection may be reduced or lost. Further information can be found at RPSM03105521 and RPSM03105630.

A scheme receiving two or more block transfers in respect of an individual or a scheme already holding protected lump sums that receives a block transfer in respect of an individual can only protect one set of rights - see RPSM03105522.

This form of lump sum protection will be lost if certain conditions are not complied with - see RPSM03105520.

The legislation automatically provides this protection; there is no need for individuals to notify HMRC of this form of protection.

Although the legislation automatically protects individuals it does not compel schemes to provide the maximum lump sum.

The lump sum must still satisfy the usual requirement - see RPSM09104130 - that a pension commencement lump sum can only be paid when the individual becomes entitled to a relevant pension (unless the individual dies within 6 months of the payment and before becoming entitled to the relevant pension). Alternatively if the member’s rights under the scheme after payment of the lump sum are not more than £2000 and the member has available lifetime allowance, instead of crystallising a pension a special type of trivial commutation lump sum may be paid in accordance with RPSM03105516. In some cases where the conditions in RPSM03105516 cannot be met an individual must be paid a pension commencement lump sum that is lower than the amount of the maximum protected lump sum because part of their rights under the scheme must be paid as a pension.