RPSM09105470 - Technical Pages: Member benefits: Lump sums: Other commutation payments relating to trivial benefit rights: Payments relating to a particular employer from occupational or public service pension schemes

Payments relating to a particular employer from occupational or public service pension schemes

[Regulation 11 SI 2009/1171][s164(1)(f)]

If a member has a small amount of benefit rights in a registered pension scheme, and that scheme is either:

• a public service pension scheme, or
• an occupational pension scheme,

it is possible for those benefit rights to be paid as an authorised member payment in the form of a one-off lump sum to the member without the need for that lump sum to satisfy the tougher test for a trivial commutation lump sum. (The requirements for a trivial commutation lump sum are set out in RPSM09104900 onwards.) The conditions that need to be met instead, for such a small lump sum to be an authorised member payment under Regulation 11 are that:

• the payment is made on or after 1^st December 2009
• the payment is made to a member who:

• has reached the age of 60, but
• has not reached the age of 75, and

• the member is at ‘arm’s length’ from any sponsoring employer of:

• the scheme paying the small lump sum, and
• any other scheme that is both an occupational pension scheme and a registered pension scheme, which relates to the same employment as the paying scheme relates to (any ‘related scheme’), and

• the ‘small lump sum’ payment does not exceed £2,000, and
• the member’s benefit rights under the scheme paying the small lump sum and any related scheme, have a combined commutation value that does not exceed £2,000 (in this context, “combined commutation value” means so much as would have to be paid by the scheme in order to extinguish the member’s entitlement to benefit under the scheme) - and
• the payment extinguishes the member’s entitlement to benefits under the paying scheme (where the member also has rights in a related scheme, those other rights do not have to be paid as a one-off lump sum as well), and
• in the 3 years before the day the small lump sum is to be paid out, there have been no recognised transfers-out relating to the member, from either:

• the scheme paying the small lump sum, nor from
• any ‘related scheme’ (which in this case includes both occupational pension schemes and public service pension schemes - so long as they are registered pension schemes relating to the same employment as the paying scheme).

A member is said to be at ‘arm’s length’ from a sponsoring employer if that individual is:

• not a ‘controlling director’ of a sponsoring employer (in relation to either the paying scheme or any related scheme), or
• not ‘connected’ with a person who is a controlling director of a sponsoring employer (in relation to either the paying scheme or any related scheme)

A person is a ‘controlling director’ of a sponsoring employer if the person is a director of the company and is able to control 20% or more of the ordinary share capital of the company (as set out in section 417(5)(b) of the Income and Corporation Taxes Act 1988).

How a person is ‘connected’ with another person is set out in section 993 of the Income Tax Act 2007.

The way in which such a ‘small lump sum’ is taxed is explained in RPSM09105490.