RPSM09104550 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: Available portion: Example 1, calculating the available portion

Example 1 - calculating the available portion of the member’s lump sum allowance

John has £450,000 of uncrystallised funds in a money purchase arrangement. He does not have an enhanced lifetime allowance. In the 2010/11 tax year he decides to use all the funds held in the arrangement to provide an unsecured pension and the maximum pension commencement lump sum permitted.

Before paying out benefits the scheme administrator writes to John telling him that he will crystallise £450,000 for lifetime allowance purposes, which represents 25% of the standard lifetime allowance for that tax year (25% of £1.8 million). The scheme administrator also asks John to

1. provide a statement confirming his anticipated available lifetime allowance at the time he wishes to draw benefits, expressed as a percentage of the standard lifetime allowance for that current tax year, based on statements he will have been provided by other scheme administrators, where benefits have been crystallised previously under other registered pension schemes, and.
   
   
2. confirm whether or not he is entitled to an enhanced lifetime allowance.
   
   

John has used up 85% of his lifetime allowance previously. John confirms that he will have 15% of the standard lifetime allowance of £1.8 million available when he draws benefits. He also confirms he is not entitled to an enhanced lifetime allowance.

The scheme administrator applies the percentage available (15%) to the standard lifetime allowance for that year (£1.8 million), and divides this by four to obtain the available portion of the lump sum allowance.

So 15% x £1.8 million = £270,000.

This figure divided by four gives £67,500.

The permitted maximum is therefore capped at £67,500.

The scheme administrator will also have identified a chargeable amount of £180,000 (£450,000 - £270,000). This can be paid as a lifetime allowance excess lump sum (minus the lifetime allowance charge due).