RPSM09104130 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Overview: Conditions for payment

Pension commencement lump sum conditions

There are various conditions that a lump sum paid by a scheme to a member must meet in order to be a pension commencement lump sum. These conditions effectively define a pension commencement lump sum, and are as follows

• The member’s entitlement to the lump sum must arise before their 75th birthday
• The member’s lump sum entitlement is connected to an arising entitlement to a ‘relevant pension’ benefit under the same registered pension scheme. Examples of when entitlement to different forms of pension benefit arise in different circumstances are at RPSM11102050. The meaning of entitlement in relation to a lump sum is at RPSM11102055. See RPSM09104060 where a lump sum is paid in anticipation of being entitled to the ‘relevant pension’ but then member dies before that entitlement arises.
• The member has not used up all their lifetime allowance at the time of payment (so they have some available lifetime allowance left). The scheme administrator will want to find out whether or not this is the case before the lump sum is paid (as the lump sum triggers a lifetime allowance test through BCE 6 - see RPSM09104520).
• The lump sum is paid within an 18-month period starting 6 months before and ending 12 months after the member becomes entitled to the lump sum. Entitlement to the pension commencement lump sum arises on the day that actual entitlement (as opposed to prospective entitlement) to the linked relevant pension arises (see RPSM09104060).
• The lump sum is paid when the member has reached normal minimum pension age. In some cases the normal minimum pension age may be substituted by a protected pension age (see RPSM03106010). Payment may be made before normal minimum pension age (or its substituted protected pension age if appropriate) where the entitlement to a relevant pension arises because the individual meets the ill health condition (see RPSM08100010).
• The lump sum payment is not what the legislation defines as an excluded lump sum (see RPSM09104160).
• The amount which can be treated as a pension commencement lump sum is an amount which does not exceed the permitted maximum (see RPSM09104210).

What is meant by relevant pension

The definition of relevant pension covers income withdrawal, a lifetime annuity or a scheme pension. RPSM09104250 explains why we link the payment to an entitlement to income withdrawal, but not to the purchase of a short-term annuity contract.

An alternatively secured pension is not a relevant pension. Where a member moves into alternatively secured pension at age 75, all their uncrystallised rights are deemed to be designated for alternatively secured pension, so a lump sum paid in relation to such a pension cannot qualify as a pension commencement lump sum.

Where a member of a scheme within paragraph 1(1)(a), (c) or (e) of Schedule 36 of the Finance Act 2004 (as listed below) has taken a lump sum before 6 April 2006 but on or after 27 July 2004 has elected to defer entitlement to the related pension until after 5 April 2006 no further lump sum can be paid in respect of the pension. The deferred pension will not be a relevant pension.

The scheme types concerned are:

• Retirement benefit schemes approved under Chapter 1 of Part 14 of ICTA 1988 (commonly known as an approved occupational pension scheme). This includes Additional Voluntary Contribution (AVC) schemes.
• Relevant statutory schemes (more commonly known as public sector pension schemes), which are not approved schemes. Examples include schemes such as those for employees of the NHS, civil service, police, fire, armed forces, teachers, Parliament and National Assemblies, and also schemes not established by statute but which have been treated as statutory schemes.
• Certain deferred annuity contracts, although not approved pension schemes prior to 6 April 2006, were automatically treated as registered pension schemes from 6 April 2006.
• Schemes or funds mentioned in section 613(4)(b) to (d) of ICTA (Parliamentary pension schemes or funds).

Where sums or assets in respect of such a deferred pension have been transferred to another registered pension scheme these restrictions will continue to apply, i.e. the pension is not a relevant pension and no further pension commencement lump sum can be taken.