RPSM03304050 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payments - tax-free lump sum over 25%: How much

How is the tax-free lump sum calculated where the member does not have enhanced protection or primary protection with lump sum rights over £375,000 on 5 April 2006?

The member’s maximum pension commencement lump sum is the value of the member’s lump sum rights under the scheme on 5 April 2006 indexed in line with the increases in the standard lifetime allowance plus an additional lump sum amount (ALSA). The amount of ALSA is found by using the formula below.

LS = the amount of pension commencement lump sum actually paid.

AC = the amount actually crystallised by becoming entitled to a pension in connection with which the pension commencement lump sum is paid, or the amount of the trivial lump sum paid in accordance with the conditions at RPSM03105516. Where a scheme pension is paid from a money purchase arrangement AC will be the value of the scheme pension purchase price, i.e. the value of the sums and assets made available to provide the scheme pension.

VUR = the value of the individual’s uncrystallised rights under the scheme on 5 April 2006.

CSLA = the standard lifetime allowance when benefit entitlement arises

FSLA = £1.5 million.

RPSM03304070 gives an example.

This amount can be paid as a pension commencement lump sum provided that at the time it is paid the member has some available lifetime allowance. If the member has some available lifetime allowance, but not enough to cover the whole lump sum any part of the lump sum that does not fall within the member’s lifetime allowance cannot be paid tax free.

The amount of the maximum pension commencement lump sum is reduced if there has been a partial transfer out of the scheme in respect of the member - see RPSM03105630.

Where the member had the right to a 100% lump sum on 5 April 2006

Where the member’s uncrystallised rights under a scheme on 5 April 2006 were either only lump sum rights, or the member could have taken all their rights as a lump sum, all the rights under the scheme may be paid as a stand-alone lump sum. This is only possible where on 5 April 2006 all the member’s rights under all their retirement benefits schemes or deferred annuity contracts relating to the same employment could have been paid out as a tax free lump sum without giving HMRC grounds for withdrawing scheme approval - see RPSM03105640.

RPSM03304100 gives more information about other payment conditions and rules relating to stand-alone lump sums.

If a member does not meet the conditions for a stand-alone lump sum they may still have a pension commencement lump sum of more than 25% if they continue to meet the conditions for scheme specific lump sum protection - see RPSM03304010. In these circumstances the limit on the lump sum is as described above and in RPSM03304070. However, a pension (or trivial lump sum as described at RPSM03105516) must also crystallise alongside the pension commencement lump sum.