RPSM09104240 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: General: Disqualifying pension credits

Payment of a pension commencement lump sum where there is a disqualifying pension credit

If all or part of the benefit entitlement from a registered pension scheme comes from a ‘disqualifying pension credit’, those pension credit rights are not included when calculating the maximum applicable amount of pension commencement lump sum that can be paid.

As the permitted maximum is the lower of the applicable amount and the available portion of the member’s lump sum allowance then, where all the member’s rights under an arrangement relate to a disqualifying pension credit, the permitted maximum will simply be nil (as the applicable amount is nil). So a lump sum cannot be treated for tax purposes as a pension commencement lump sum in such cases. This will not change no matter how high the available portion of the member’s lump sum allowance is.

Where only part of the arising benefit entitlement represents a disqualifying pension credit the applicable amount is discounted proportionately.

Definition of a disqualifying pension credit

A pension credit is a disqualifying pension credit if at the time the pension credit was created, the member’s former spouse or former civil partner’s pension that was being shared with the member was actually in payment.

If the pension credit arose from the member’s former spouse or former civil partner's benefit that had not yet come into payment at that time, it is not a disqualifying pension credit. The position is not affected where the member’s former spouse‘s or former civil partner's benefits come into payment after the creation of that pension credit.

Reason for exclusion

The purpose behind this exclusion is to ensure that where a pension in payment is split through a pension sharing order, the person who is provided with the pension credit will not be able to take a tax-free lump sum from the benefit rights that are acquired. This is on the basis that when the member’s former spouse or former civil partner’s benefits first came into payment, that former spouse or civil partner will have taken (or had the opportunity to take) a tax-free lump sum in respect of the benefits, so it would not be appropriate to allow a lump sum to be taken free of income tax from the pension credit rights. This applies regardless of whether or not a lump sum was actually taken by the pension debit member.

RPSM09104360 gives an example.