RPSM09104030 - Technical Pages: Member benefits: Lump sums: Overview: What happens when the limits on authorised lump sums are exceeded

What happens when the limits on authorised lump sums are exceeded

If a registered pension scheme makes a lump sum payment that does not fit into any of the seven authorised member lump sum payment definitions it is an unauthorised member payment, and will be taxed as such (see RPSM04104020 and RPSM04104040).

Where a scheme makes a payment that meets the definition of an authorised lump sum payment, but the amount paid simply exceeds the limit specified in the legislation, this does not mean that the whole payment becomes unauthorised in all cases.

For the following lump sum payments

• a pension commencement lump sum,
• a stand-alone lump sum - see RPSM03105155 and RPSM03105202,
• a short service refund lump sum,
• a refund of excess contributions lump sum, and
• a winding-up lump sum (which is capped to 1% of the standard lifetime allowance at the time of payment),

the part of the payment that is within limits will still represent an authorised lump sum payment, as appropriate. Any excess will not be treated as being part of that lump sum payment, and will become either

• another form of authorised lump sum payment or scheme administration member payment (where it falls within the relevant definition), or
• an unauthorised member payment, and be taxed as such.

With the other forms of authorised member lump sum payments, either

• the limit is an integral part of the definition (so if the limit is breached the whole payment falls out of the definition, as with payment of a trivial commutation lump sum), or
• there are no limits as such, although the amounts paid are tested for lifetime allowance purposes (as with payment of a serious ill-health lump sum or lifetime allowance excess lump sum).