RPSM09105110 - Technical Pages: Member benefits: Lump sums: Winding-up lump sum

Payment of a winding-up lump sum

Where an occupational pension scheme is being wound up and the member’s benefit rights are commuted to a lump sum payment, that may qualify for tax treatment as a winding-up lump sum provided the conditions set out below are satisfied. Unlike the payment of a trivial commutation lump sum which cannot be paid before the member reaches age 60, there is no lower age limit for payment of a winding-up lump sum. The conditions that the lump sum has to satisfy in order to qualify for tax treatment as a winding-up lump sums are that:

Any employer of the member at the time the lump sum is paid who has made contributions under that scheme in the last five years in respect of the member who is to receive the winding-up lump sum:

1. is not making contributions under any other registered pension scheme in respect of the member, and
2. undertakes to HMRC not to make such contributions during the period of 1 year from the date the lump sum is paid.

The undertaking at 2. above should be in writing (there is no stock form for this) and confirm that the employer will meet the condition in paragraph 10(3)(c) of Schedule 29 to FA 2004. It should be sent to HMRC at the following address before the winding-up lump sum is paid. One declaration per employer listing all the members in respect of whom they give the undertaking at that time is sufficient.

Pension Schemes Services
HM Revenue & Customs
FitzRoy House
Castle Meadow Road
Nottingham
NG2 1BD

What is meant by employer

The above restrictions only apply to current employers of the member who have, in the five years before the payment made contributions in respect of the member to the scheme which is being wound up (whether or not the employer is still participating in the scheme). So if a member has a current employer who has never contributed to the scheme which is being wound up, then there is no need for that employer to give such an undertaking.

Employers who have contributed to other pension schemes, but not to the pension scheme winding up, are outside the definition of employer for this purpose, even if benefits under those other schemes have transferred across into the scheme that is winding up. So long as they have never contributed to the scheme which is winding up, they do not have to supply an undertaking.

Other conditions

To qualify for tax treatment as a winding-up lump sum the payment must also

• be paid only where the member has available lifetime allowance (although the payment is not tested against the member’s available lifetime allowance, this requirement is there to discourage the use of this payment method to avoid the lifetime allowance charge by preventing amounts being commuted this way where the member has exhausted their lifetime allowance),
• extinguish the member’s entitlement to benefits under the scheme,
• be paid before the member’s 75^th birthday, and
• only be paid where benefits are deemed trivial (see RPSM09105120).

Further details about the taxation of winding-up lump sums are at RPSM09105150.

Lifetime allowance

The payment of a winding-up lump sum is not within the scope of BCE 6 and so does not trigger a lifetime allowance test, although as mentioned above, the member must have some lifetime allowance remaining at the time of payment for it to be treated as a winding-up lump sum.

The payment of a winding-up lump sum is not caught by BCE 6 and so does not trigger a lifetime allowance test, although the member must have some lifetime allowance remaining at the time of payment.