RPSM09104060 - Technical Pages: Member benefits: Lump sums: Overview: entitlement to an authorised lump sum

If the pension commencement lump sum entitlement arose or other lump sum was paid, on or after 6 April 2011 you should first read the guidance at RPSM09104195.

Member’s entitlement to an authorised lump sum payment

For the purposes of the tax legislation, a person becomes entitled to a lump sum at the time the person acquires an actual right rather than a prospective right to receive the lump sum benefit. The change occurs at the point the person has become actually entitled to receive the lump sum.

The exception is where a pension commencement lump sum is being paid. Here, entitlement is normally deemed to arise immediately before the person becomes entitled to the pension benefit which the pension commencement lump sum is linked to (see RPSM09104130). So the lump sum entitlement arises on the same day as the linked pension entitlement, but is deemed to arise before the pension entitlement. This can make a difference where the member is approaching their lifetime allowance (see the example on RPSM11105070).

The lump sum payment can qualify as a pension commencement lump sum as long as it is paid within an 18-month period, starting 6 months before and ending 12 months after the date the member becomes entitled to it. The member is deemed to become entitled to the lump sum for tax purposes immediately before they become entitled to the pension/annuity/drawdown which the lump sum is being paid in connection with.

Where the member receives a lump sum in anticipation of becoming entitled to the relevant pension, but then dies before that entitlement arises, the legislation deems the member to have become entitled to the lump sum immediately before death. This means that the lump sum payment becomes an authorised payment, providing it did not exceed the member’s available lump sum allowance immediately before the member died, and providing the other conditions for a pension commencement lump sum are satisfied.

[The Registered Pension Schemes (Authorised Payments) Regulations 2009 (SI2009/1171)]

These Regulations authorise certain lump sums paid from a registered pension scheme to or in respect of a member, where:

• the payment results in a small lump sum (see RPSM09105400), or
• in circumstances involving certain errors (see RPSM09108000).

The entitlement to small lump sum payments typically arises when the right to actual payment arises. In the case of pension commencement lump sum errors, entitlement arises on the basis already described above for pension commencement lump sums. Where the entitlement to pension commencement lump sum payments is only established after death, the entitlement to the portion of the payment that is authorised by these regulations can be said to have arisen for tax purposes at the point in time immediately before death.