RPSM13102770 - Technical Pages: International: Application of charges to non-UK schemes: Modifications: Lump sum rule

The lump sum rule

[Schedule 29 paras 1(4A), 2(6-6A), 2(7), 4(4), 5(1)(c), 7(6), 10(4), 11] [The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207] [The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) (Amendment) Regulations 2009 - SI2009/2047]

Regulation 15 of The Pension Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 modifies schedule 29 as it applies to relevant non-UK schemes. This is to allow the normal tax-free lump sum to be paid from such a scheme after:

• it has received a recognised transfer (see RPSM14101020) in respect of the member, or
• the member has made an election under paragraph 15 of schedule 34 that a benefit crystallisation event be treated as occurring (see RPSM13102570) if they became entitled to the lump sum on or after the date on which the benefit crystallisation event is treated as occurring.

These 2 events are described as a relevant BCE in this legislation.

The types of lump sum concerned are the pension commencement lump sum, the serious ill-health lump sum, the trivial commutation lump sum and the winding-up lump sum.

Under schedule 29 those lump sums may only be authorised payments if the member has part or all of their lifetime allowance available. However, in these two circumstances there will have been a deemed benefit crystallisation event. So if schedule 29 were not modified members of non-UK schemes would be treated unfairly as compared to members of a registered pension scheme. For example, if an individual used up 80% of their lifetime allowance as a consequence of a recognised transfer of their rights to a non-UK scheme (benefit crystallisation event 8) they would be left with only 20% of their lifetime allowance. Any subsequent lump sum in excess of 5% of the lifetime allowance paid in connection with the member becoming entitled to a pension would be an unauthorised payment even though this is the first payment of actual benefits to the member.

Pension commencement lump sums

Paragraph 1(4A) of schedule 29 provides therefore that when the non-UK scheme pays a lump sum the amount that was deemed to have been crystallised by a relevant BCE is to be ignored in determining whether all or part of the member’s lifetime allowance is available.

Calculation of available LTA after BCE 8 transfer

Paragraph 1 (4B) of schedule 29 provides that where a recognised transfer has been made and a benefit crystallisation event 8 has therefore occurred the amount of the lifetime allowance available has to be reduced by the aggregate of:

• the amount of any previous pension commencement lump sum paid to or in respect of the member by a recognised overseas pension scheme, to the extent that it is referable to the member's relevant transfer fund (seeRPSM13102170), and
• the amount which would have crystallised by virtue of the member becoming entitled to a pension, had the scheme paying it been a registered pension scheme, to the extent that it is so referable.

Calculation of available LTA after election under paragraph 15 of schedule 34

Paragraph 1 (4C) of schedule 29 provides that where the member of a relevant non-UK scheme elected that a paragraph 15 benefit crystallisation event be treated as occurring the amount of lifetime allowance available has to be reduced by the aggregate of:

• the amount of any previous pension commencement lump sum to which the member became entitled under the scheme since the paragraph 15 BCE occurred, to the extent that the amount is referable to the member’s UK tax-relieved fund (see RPSM13102150), and
• in respect of any previous pension to which the member has become entitled under the scheme since the paragraph 15 BCE occurred, the amount which would have crystallised by virtue of the member becoming entitled to the person, had the scheme paying it been a registered pension scheme, to the extent that the amount is referable to the member’s UK tax-relieved fund.

Impact on calculations of pension commencement lump sums

Taking into account those amounts restricts the member's tax-free lump sum entitlement in line with the treatment of lump sums paid from registered pension schemes.

Regulation 15(3) modifies paragraph 2(6) of schedule 29 (RPSM09104220 refers) as it applies to relevant non-UK schemes in a similar way by substituting a different definition of "AAC". It also modifies paragraph 2(7) by adding paragraph 2(6A). That is in order to determine the permitted maximum of a pension commencement lump sum paid from such a scheme.

Under schedule 29 AAC is deducted from the current lifetime allowance in order to determine the permitted maximum of a pension commencement lump sum that can be paid to a member. In broad terms AAC is the amount crystallised for lifetime allowance purposes by previous benefit crystallisation events. As modified by regulation 15(3), AAC is the aggregate of a and b below:

1. The amounts crystallised by each benefit crystallisation event which has occurred in relation to the member before the member becomes entitled to the lump sum on each occasion on which entitlement to a pension arises. But amounts that were deemed to be crystallised by a relevant BCE are excluded.
2. If a relevant BCE has occurred, the amount which would have crystallised, had the scheme paying it been a registered pension scheme, in respect of any previous pension commencement lump sum or pension to which the member became entitled since the relevant BCE occurred, to the extent that the amount is referable to the member’s relevant transfer fund or UK tax-relieved fund. But any amount included in a above is excluded.

Impact on calculations for other categories of authorised lump sum

The inserted paragraphs 4(4), 7(6) and 10(4) of schedule 29 provide for similar bases of calculation of the amount of lifetime allowance available to a member where the lump sum paid from the non-UK scheme following a relevant BCE is a serious ill-health lump sum, a trivial commutation lump sum or a winding-up lump sum respectively.

Regulation 15(5) modifies paragraph 5(1)(c), which specifies one of the conditions for a lump sum to be a short service refund lump sum (see RPSM09104700), as it applies to relevant non-UK schemes. It provides for a deemed crystallisation event occurring on a relevant BCE to be disregarded when determining whether or not the condition that there has been no previous benefit crystallisation event has been met.

Regulation 15(8) modifies paragraph 11 of schedule 29 as it applies to relevant non-UK schemes by adding another condition for a lump sum to be a lifetime allowance excess lump sum (see RPSM09105200). The inserted paragraph 11(bb) requires that the lump sum is not paid from the relevant transfer fund of a qualifying recognised overseas pension scheme (see RPSM14101050) or from the UK tax-relieved fund of a relevant non-UK scheme.

The regulation 15 (8) modification applies to a lump sum payment where a member of a relevant non-UK scheme has made an election under paragraph 15 of schedule 34 that a benefit crystallisation event be treated as occurring (see RPSM13102570) if:

• the notice of the election was given to HMRC on or after 23 July 2009, and
• the member became entitled to the lump sum on or after the date on which the benefit crystallisation event is treated as occurring.