RPSM03105520 - Technical Pages: Protecting pension rights from tax charges: Lump sum: Scheme specific protection: Conditions

Protecting lump sum rights exceeding 25%: conditions

[Para 31(3) to (9) Sch 36] [Article 25 - 25D The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572] 

For scheme specific protection under paragraphs 31 to 34 Schedule 36 FA 2004 to apply, three conditions must be satisfied

• the registered pension scheme from which benefits are paid must be either the scheme in which the rights were held on 5 April 2006 (the original scheme) or a registered pension scheme to which the rights were transferred as part of a block transfer or a registered pension scheme to which the final transfer in a series of block transfers has been made. The original scheme must be a retirement benefit scheme or a deferred annuity contract (section 32 policy) as defined at paragraph 1(1)(a) to (e) of Schedule 36 Finance Act 2004. A block transfer can be made to any registered pension scheme. RPSM03105521 gives more information on block transfers. RPSM03105630 explains what happens if a partial transfer is made from a protected scheme.
• the uncrystallised lump sum rights in the scheme on 5 April 2006 were more than 25% of the value of the uncrystallised pension rights in the scheme on that date, and
• the individual must become entitled to all of their pension and lump sum rights (that were not in payment on 5 April 2006) under the scheme on the same day. This condition will still be met where the individual dies within six months of the payment of the lump sum and before becoming entitled to the relevant pension. Alternatively the pension commencement lump sum is paid together with a special type of trivial lump sum (not to be confused with the usual trivial commutation lump sum) as described at RPSM03105516, which means the trivial lump sum must be paid no later than one month after the pension commencement lump sum.

Taking the lump sum benefit from the scheme and then transferring the remaining benefits to another scheme and designating them into drawdown pension fund (before 6 April 2011 called unsecured pension fund) would not be becoming entitled to all rights under the same scheme. In these circumstances the whole lump sum will be an unauthorised member payment. To meet the payment condition for a protected lump sum the member must designate the funds into drawdown pension fund and have the lump sum paid from the same pension scheme. The crystallised drawdown pension fund can then be transferred to continue as drawdown pension fund under the receiving scheme.

If the scheme that has the protected lump sum does not offer a drawdown pension fund facility, to be authorised payments the individual has two options

1. Transfer the rights into a new scheme that does provide a drawdown pension fund facility before crystallising any benefits from the transferring scheme. The benefits can then be fully crystallised under the receiving scheme as a pension commencement lump sum and drawdown pension fund. Unless the transfer is a block transfer the right to a protected lump sum will be lost.
2. Stay within the protected pension scheme and use the form of pension offered by that scheme. The lump sum will remain protected but the individual will not be able to have a drawdown pension fund.

Multiple pensions under the same registered pension scheme

[Article 23ZB to 23 ZE The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572]

If there is a single pension commencement lump sum being paid in connection with at least 2 of the following types of pension from the same registered pension scheme

• a scheme pension under a defined benefits arrangement,
• a scheme pension under a money purchase arrangement,
• a lifetime annuity 

the requirement for the entitlement to all of the pensions to occur on the same day does not apply.

In such cases, the individual must become entitled to all of their pensions within six months of first becoming entitled to any type of pension under the pension scheme. The eighteen month window for paying the pension commencement lump sum (see RPSM09104120) operates by reference to the date on which the member became entitled to the last of the pensions in connection with which it is paid.

If the scheme administrator believes that but for the member’s death, the pension commencement lump sum would have paid in relation to at least two of the different types of pension and the individual dies before becoming entitled to all or any of the pensions concerned, then provided the scheme administrator thinks the individual would have become entitled to all of their pensions within 6 six months of either the date of entitlement to the last pension to which an actual entitlement arose or (where the member did not become entitled to any of the pensions before they died) the earliest date on which the scheme administrator considers the member would have become entitled to any of the pensions. The eighteen month window for paying the pension commencement lump sum in these death cases is where entitlement to at least one pension actually arose, the latest date on which the member became actually entitled to a pension.

Where the individual was entitled on 5 April 2006 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. RPSM03105640 explains when all scheme benefits may be paid as a single lump sum.

In paragraphs 31-34 of Schedule 36 to Finance Act 2004, the terms used to describe the value of the individual’s uncrystallised lump sum rights and pension rights on 5 April 2006 are VULSR and VUR respectively.