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Pensions Tax Manual

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Member benefits: lump sums: protection of pre-6 April 2006 lump sum rights: scheme-specific lump sum protection - overview

Glossary PTM000001
   

Protecting lump sum rights that exceeded 25% of uncrystallised pension rights on 5 April 2006
Conditions for scheme-specific lump sum protection
How scheme-specific protection of lump sum rights of more than 25% works
Payment of a scheme-specific protected pension commencement lump sum with a trivial lump sum
How to pay scheme-specific lump sum benefits
Lump sum not more than available lifetime allowance and no partial transfer out
How to pay protected lump sum benefits exceeding 25%: examples for money purchase arrangements
How to pay protected lump sum benefits exceeding 25% where there is not enough available lifetime allowance: example
How to pay protected lump sum benefits exceeding 25% where there has been a partial transfer out of rights after 5 April 2006
Stand-alone lump sums

Protecting lump sum rights that exceeded 25% of uncrystallised pension rights on 5 April 2006

Paragraphs 31 to 34 Schedule 36 Finance Act 2004

Some individuals will have had lump sum rights that exceeded 25% of their uncrystallised pension rights in particular retirement benefit schemes or deferred annuity contracts (for example, section 32 policies) on 5 April 2006. From 6 April 2006 onwards scheme administrators of such schemes or deferred annuity contracts may still pay lump sum benefits whose value exceeds 25% of the total value of a member’s uncrystallised pension rights in the scheme, based on scheme records showing the member’s uncrystallised pension and lump sum rights on 5 April 2006. The tax rules set out how the calculation of lump sum rights should be made in these circumstances and the conditions applying to the payment of the benefits.

There is no need to claim this protection from HMRC. The legislation applies the protection to the individual automatically.

Although the lump sum paid is still a pension commencement lump sum, it is normally referred to as a scheme-specific lump sum and the protection as scheme-specific lump sum protection. This guidance therefore uses those terms.

The tax rules providing the protection allow schemes to pay individuals a higher pension commencement lump sum than the normal 25% of the amounts crystallising at the two benefit crystallisation events (the pension being brought into payment and the pension commencement lump sum associated with the pension).

Where an individual could take 100% of their rights under the scheme on 5 April 2006 as a lump sum benefit there may be a single benefit crystallisation event provided no benefits have accrued after 5 April 2006. In such cases, different legislative provisions allow all the scheme benefits toy be paid as a lump sum, known as a stand-alone lump sum (see below).

Where scheme-specific lump sum protection does not apply

This form of protection does not apply where an individual had lump sum rights exceeding £375,000 at 5 April 2006 and at the time of taking the lump sum, had valid primary protection, or enhanced protection, or both. The £375,000 limit includes not only uncrystallised lump sums but also the deemed value of lump sum rights that were taken before 6 April 2006. In those cases, the lump sum rights are paid as set out in PTM063110 under primary protection, or PTM063120 under enhanced protection.

Paragraph 25(5)(a) Schedule 36 Finance Act 2004

This form of protection cannot apply to personal pension schemes (unless there has been a block transfer in relation to the member into the personal pension scheme on or after 6 April 2006 - see PTM063150 - although whether the receiving scheme can pay the higher lump sum will depend on its rules) or retirement annuity contracts.

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Conditions for scheme-specific lump sum protection

Paragraphs 31(3) to (9) Schedule 36 Finance Act 2004; Article 25 to 25D The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

For scheme-specific protection under paragraphs 31 to 34 Schedule 36 Finance Act 2004 to apply, three conditions must be satisfied:

  • the registered pension scheme from which benefits are paid must be either the scheme in which the rights were held on 5 April 2006 (the original scheme) or a registered pension scheme to which the rights were transferred as part of a block transfer or a registered pension scheme to which the final transfer in a series of block transfers has been made. The original scheme must be a retirement benefit scheme or a deferred annuity contract (for example, a section 32 policy) as defined at paragraph 1(1)(a) to (e) of Schedule 36 Finance Act 2004, but any subsequent block transfer can have been made to any type of registered pension scheme. PTM063150 gives more information on block transfers and also explains what happens if a partial transfer is made from a protected scheme.
  • the value of the individual’s uncrystallised lump sum rights in the scheme on 5 April 2006 were more than 25% of the value of their uncrystallised pension rights in the scheme on that date, and
  • the individual must become entitled to all of their pension and lump sum rights (that were not in payment on 5 April 2006) under the scheme on the same day except in certain circumstances where the individual is entitled to multiple pensions of more than one sort (see next section for more detail) . This condition will still be met where the individual dies within six months of the payment of the lump sum and before becoming entitled to the relevant pension. Alternatively the pension commencement lump sum is paid together with a special type of trivial lump sum (not to be confused with the usual trivial commutation lump sum) as described at Payment of a scheme-specific protected pension commencement lump sum with a trivial lump sum, which means the trivial lump sum must be paid no later than one month after the pension commencement lump sum.

Multiple pensions under the same registered pension scheme

Article 23ZB to 23ZE The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

If there is a single pension commencement lump sum being paid in connection with at least 2 of the following types of pension from the same registered pension scheme

  • a scheme pension under a defined benefits arrangement,
  • a scheme pension under a money purchase arrangement,
  • a lifetime annuity

the requirement for the entitlement to all of the pensions to occur on the same day does not apply.

In such cases, the individual must become entitled to all of their pensions within six months of first becoming entitled to any type of pension under the pension scheme. The eighteen-month window for paying the pension commencement lump sum (see PTM063210) operates by reference to the date on which the member became entitled to the last of the pensions in connection with which it is paid.

Death before becoming entitled to the pension

Where the scheme administrator believes that but for the member’s death, the pension commencement lump sum would have been paid in relation to at least two of the different types of pension and the individual dies before becoming entitled to all or any of the pensions concerned and in addition, the scheme administrator thinks the individual would have become entitled to all of their pensions within six months of either:

(i) the date of entitlement to the last pension to which an actual entitlement arose or

(ii) the earliest date on which the scheme administrator considers the member would have become entitled to any of the pensions (in a case where the member did not become entitled to any of the pensions before they died),

the eighteen-month window for paying the pension commencement lump sum is based on the assumption that entitlement to the pension commencement lump sum arose on either

(i) the latest date on which the member became actually entitled to a pension (where entitlement to at least one pension actually arose) or

(ii) the earliest date on which the scheme administrator thinks the individual would have become entitled to any of the pensions (where the member has died without having actually become entitled to a pension).

Where the individual was entitled on 5 April 2006 to have all their benefits under all schemes relating to the same employment paid as a lump sum and they have had no relevant benefit accrual under the scheme (see PTM092430) all benefits may still be paid as a lump sum as long as certain conditions are met. Stand-alone lump sums below explains when all scheme benefits may be paid as a single lump sum.

In paragraphs 31-34 of Schedule 36 to Finance Act 2004, the terms used to describe the value of the individual’s uncrystallised lump sum rights and pension rights on 5 April 2006 are VULSR and VUR respectively. These are explained at PTM063140.

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How scheme-specific protection of lump sum rights of more than 25% works

Paragraphs 31 to 34 Schedule 36 Finance Act 2004

Article 25 to 25D and 23C The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

The value of an individual’s uncrystallised lump sum rights in a scheme on 5 April 2006 is identified. The legislation refers to these rights as VULSR.

The value of an individual’s uncrystallised pension rights in a scheme on 5 April 2006 is identified. The legislation refers to these rights as VUR.

PTM063140 explains how VULSR and VUR are calculated.

Where VULSR/VUR x 100 is more than 25, the legislation for the maximum pension commencement lump sum is rewritten to allow a scheme to pay a lump sum of more than 25%. Broadly the scheme will be able to pay a lump sum of the value of the allowable lump sum rights that were in the scheme on 5 April 2006 revalued by increasing the value on 5 April 2006 by 20% for such time as the standard lifetime allowance is not more than £1.8 million plus an additional lump sum amount (ALSA).

Where on 5 April 2006 the individual was entitled to have all their benefits under all schemes relating to the same employment paid as a lump sum and they have had no relevant benefit accrual under the scheme since then (see PTM092430), all benefits may still be paid as a lump sum as long as certain conditions are met. This will not be a pension commencement lump sum but a stand-alone lump sum. Stand-alone lump sums below explains when a stand-alone lump sum may be paid. If the conditions for a stand-alone lump sum are not met, an individual may still qualify for a protected pension commencement lump sum.

Important points to note for scheme-specific lump sum protection

This form of protection is specific to a particular pension scheme. If a transfer is made from the protected scheme then scheme-specific lump sum protection may be reduced or lost. For more details see PTM063150.

Scheme-specific lump sum protection is also lost if certain other conditions are not complied with - see Conditions for scheme-specific lump sum protection There is no need for individuals to notify HMRC of this form of protection as the legislation provides it automatically.

Although the legislation automatically protects individuals it does not compel schemes to provide the maximum lump sum.

The lump sum must still satisfy the usual requirement - see PTM063220 - that a pension commencement lump sum can only be paid when the individual becomes entitled to a relevant pension (unless the individual dies within 6 months of the payment and before becoming entitled to the relevant pension). Alternatively, if the member’s rights under the scheme after payment of the lump sum are not more than £10,000 and the member has available lifetime allowance, instead of crystallising a pension those rights may be commuted and also paid as a lump sum - see next section for details.

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Payment of a scheme-specific protected pension commencement lump sum with a trivial lump sum

Article 23C The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

The normal rule is that a pension commencement lump sum must be paid in connection with an entitlement to a relevant pension - see PTM063220. However, a scheme-specific protected lump sum may instead be paid in connection with a trivial lump sum - as defined below. Note that this is a special kind of trivial lump sum and it should not be confused with the usual trivial commutation lump sum.

If the lump sum is not paid in connection with either a relevant pension or a trivial lump sum, as defined below, the lump sum payment cannot be a pension commencement lump sum (PCLS), and so cannot be a scheme-specific lump sum.

Where the payment of a scheme-specific lump sum leaves a relatively small amount to provide a pension in respect of the member, this provision allows the total rights under the scheme to be paid in lump sum form. The scheme-specific lump sum is tax-free. The trivial lump sum is classed under the tax legislation as special kind of lump sum through commutation of crystallised rights. This means that payment of the trivial lump sum is not a benefit crystallisation event and that the whole trivial lump sum is taxable at the member’s marginal rate of tax.

What is a trivial lump sum?

A lump sum is a trivial lump sum if:

  • it is not more than £10,000;
  • it is paid when the member has reached age 55 (or an earlier age if they either meet the ill-health condition or have a protected pension age)
  • when paid the member has available lifetime allowance (as the pension commencement lump sum/scheme-specific lump sum will crystallise before the trivial lump sum there needs to be available lifetime allowance after payment of the pension commencement lump sum/scheme-specific lump sum). Where the lump sum is paid after age 75, the amount of lifetime allowance used up by a BCE 5 or BCE 5B that occurred in relation to the member is ignored for the purpose of calculating the amount of available lifetime allowance. But lifetime allowance is used up by any event occurring in relation to the member after reaching age 75 if it would have been a benefit crystallisation event but for the fact that it occurred after age 75;
  • apart from any pension in payment before 6 April 2006, it extinguishes the member’s entitlement to benefit under the scheme;
  • it is paid in connection with a scheme-specific lump sum, and no later than one month after payment of that lump sum; and
  • since the payment of the scheme-specific lump sum:

    • no contributions have been made to the scheme in respect of the member
    • no recognised transfer has been made into or out of the scheme in respect of the member, and
    • no annuity or scheme pension has been purchased by sums or assets held by the scheme for the benefit of the member

The reference to extinguishing the member’s entitlement to benefits under the scheme is to all the rights that could reasonably have been known about at the time of the payment. The lump sum will not cease to be an authorised payment purely because further entitlement is later created that could not have been known about at the time of the initial payment, for example, through a pay revision.

Where specifically identifiable contingent beneficiary’s benefits/rights exist, these too must be commuted with the member’s benefits.

In some cases, where the conditions above cannot be met, an individual must be paid a pension commencement lump sum that is lower than the amount of their maximum scheme-specific lump sum, because part of their rights under the scheme must be paid as a pension if the lump sum is to meet the conditions for a pension commencement lump sum.

Example

Andy has a right to a scheme-specific lump sum of £100,000. The value of his total rights under his pension scheme is £102,000. On 1 June 2015, Andy has available lifetime allowance of £101,000. Andy’s pension scheme pays the whole of his rights to him as lump sums on 1 June 2015. £100,000 is paid as a scheme-specific lump sum and as a pension commencement lump sum it is not taxable. After paying the scheme-specific lump sum, Andy still has £1,000 available lifetime allowance. The remaining £2,000 can be (and is) paid to Andy as a trivial lump sum. The whole £2,000 is taxable and PAYE is applied to this trivial lump sum.

 

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How to pay scheme-specific lump sum benefits

Paragraph 34 Schedule 36 Finance Act 2004

Where an individual had lump sum rights at 5 April 2006 that exceeded 25% of their uncrystallised pension rights in a scheme and they meet the conditions for a scheme-specific lump sum, paragraph 34 Schedule 36 Finance Act 2004 modifies paragraphs 2 and 3 of Schedule 29 Finance Act 2004. The modifications allow the payment of a pension commencement lump sum with a value greater than 25% of the combined value of the lump sum itself plus the value of the connected pension.

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Lump sum not more than available lifetime allowance and no partial transfer out

Where the payment of the lump sum benefit will not use up all of the individual’s available personal lifetime allowance (which may be greater than the standard lifetime allowance), and there has been no partial transfer-out in respect of the individual, the maximum amount of the scheme-specific lump sum payable as a pension commencement lump sum will be the amount of “VULSR” on 5 April 2006 increased by 20% for so long as the standard lifetime allowance does not exceed £1.8 million, plus an additional lump sum (ALSA) which relates to any increase in the value of the individual’s benefits that has occurred from 6 April 2006 onwards.

The amount of a scheme specific lump sum is currently found by using the following formula

(VULSR x ULA/FSLA) + ALSA

VULSR = the value of the individual’s uncrystallised lump sum rights under the scheme on 5 April 2006)

ULA = is the greater of £1.8 million and the standard lifetime allowance when benefit entitlement arises

FSLA = £1.5 million.

ALSA is the amount found by the formula

[LS + AC - (VUR x CSLA/FSLA)]/4

LS = the amount of pension commencement lump sum actually paid

AC = the amount actually crystallised by becoming entitled to a pension in connection with which the pension commencement lump sum is paid, or the amount of the trivial lump sum paid in accordance with the conditions described earlier above. Where a scheme pension is paid from a money purchase arrangement, AC will be the scheme pension purchase price, i.e. the value of the sums and assets made available to provide the scheme pension. Where the member becomes entitled to the connected pension after reaching age 75, although there is no actual benefit crystallisation event, AC is the amount that would have crystallised had there been such an event.

VUR = the value of the individual’s uncrystallised rights under the scheme on 5 April 2006.

CSLA = the current standard lifetime allowance.

FSLA = £1.5 million

PTM063140 explains how the value of VULSR and VUR is obtained.

If the formula for ALSA gives a negative result, ALSA will be nil.

Finding the maximum allowable pension commencement lump sum is relatively straightforward for money purchase arrangements. PTM063240 gives examples.

Finding the maximum allowable pension commencement lump sum under a defined benefits arrangement that provides lump sum benefits by commutation is more complex - unless the scheme uses a lump sum commutation factor of 20:1. PTM063240 gives an example of paying a protected lump sum of more than 25% from a defined benefits arrangement.

Partial transfers reduce amount of lump sum

Where there has been a partial transfer-out in respect of the individual, the amount of the lump sum is adjusted to reflect the transfer-out - see below How to pay protected lump sum benefits exceeding 25% where there has been a partial transfer out of rights after 5 April 2006.

Lump sum more than available lifetime allowance

Where the value of the proposed lump sum benefit is greater than the available amount of the individual’s lifetime allowance, the proposed lump sum benefit should be calculated as described above. If all of the proposed lump sum benefit is paid, part of it will be subject to the lifetime allowance charge - see PTM083000.

No lifetime allowance available

Where the individual has already used all of their available personal lifetime allowance before becoming entitled to the lump sum, no pension commencement lump sum may be paid. Protection for the lump sum rights in the scheme has no effect.

100% tax free lump sums

Where on 5 April 2006 the individual has the right to take all their uncrystallised pension rights under all pension schemes relating to the same employment as a lump sum see Stand-alone lump sums below.

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How to pay protected lump sum benefits exceeding 25%: examples for money purchase arrangements

Paragraph 34 Schedule 36 Finance Act 2004

Example 1

Ruth had a protected lump sum right of £50,000 in a retirement benefit scheme on 5 April 2006. The value of her total rights under the scheme (the fund from which her benefits, including lump sum, will be provided) was £100,000 on 5 April 2006.

Ruth took her lump sum under the scheme in May 2015 when the standard lifetime allowance was £1.25 million and she did not have fixed protection at that time. At this point the value of her rights under the scheme had fallen to £80,000.

Ruth’s lump sum rights in May 2015 are in principle made up of two elements, the revalorised amount of the lump sum rights as at 5 April 2006 and the ALSA lump sum. In Ruth’s case the revalorised lump sum is:

£50,000 x (£1.8 million/£1.5 million) = £60,000

The amount of the ALSA is the minimum zero, calculated as

£80,000 - (£100,000 x £1.25 million/£1.5 million)/4

using the ALSA formula above.

So Ruth could be paid a pension commencement lump sum from the scheme of £60,000.

Example 2

The facts are the same as those for Example 1 above except that the value of Ruth’s rights under the scheme in May 2015 is £160,000.

The value of the revalorised amount of the lump sum rights as at 5 April 2006 is unchanged from Example 1 so the revalorised lump sum is £60,000.

However, the ALSA lump sum now has an actual value as Ruth’s scheme rights have increased by 60% whilst there is no increase in her standard lifetime allowance between 6 April 2006 and May 2015. The amount of the ALSA lump sum will be £19,167 calculated, using the ALSA formula above, as

£160,000 - (£100,000 x £1.25 million/£1.5 million)/4

So Ruth can be paid a pension commencement lump sum from the scheme of £79,167, being £60,000 (the revalorised 5 April 2006 lump sum rights) plus £19,167 (the ALSA lump sum).

Example 3

The facts are the same as those for Example 1 above except that Ruth applied for fixed protection by 5 April 2012 and this is still valid. For more detail about fixed protection - see PTM093100.

The value of the revalorised lump sum rights as at 5 April 2006 is unchanged from Example 1 and is £60,000.

Since Ruth has fixed protection, CSLA is replaced in the ALSA formula by her underpinned lifetime allowance of £1.8 million since this is greater than the standard lifetime allowance of £1.25 million for May 2015. The amount of the ALSA lump sum will be the minimum zero calculated as

£80,000 - (£100,000 x £1.8 million/£1.5 million)/4

So Ruth can be paid a pension commencement lump sum from the scheme of £60,000 (the revalorised 5 April 2006 lump sum rights).

Example 4

The facts are the same as those for Example 3 above except that the value of Ruth’s rights under the scheme in May 2015 is £160,000.

The value of the revalorised amount of the lump sum rights as at 5 April 2006 is unchanged from Example 1 so the revalorised lump sum is £60,000.

However, the ALSA lump sum now has an actual value as Ruth’s scheme rights have increased by 60% which exceeds the increase in her standard lifetime allowance between 6 April 2006 and May 2015. Using the ALSA formula at Lump sum not more than available lifetime allowance and no partial transfer out, the amount of the ALSA lump sum is £10,000 calculated, as follows:

£160,000 - (£100,000 x £1.8 million/£1.5 million)/4.

So Ruth can be paid a pension commencement lump sum from the scheme of £70,000, being £60,000 (the revalorised 5 April 2006 lump sum rights) plus £10,000 (the ALSA lump sum). This compares to £79,167 if all the circumstances were the same but she had not taken fixed protection (see Example 2).

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How to pay protected lump sum benefits exceeding 25% where there is not enough available lifetime allowance: example

Peter has a proposed lump sum benefit of £50,000 under a registered pension scheme.

Peter is entitled to take this lump sum as a stand-alone lump sum - see heading below.

The lump sum is calculated on the basis of Peter’s protected lump sum rights in the scheme.

Immediately before taking benefits from this scheme, his available lifetime allowance is valued at £20,000. The maximum Peter can take as a pension commencement lump sum is £50,000. If he does, £20,000 of his pension commencement lump sum is free of income tax - but £30,000 is subject to the lifetime allowance charge of 55% - see PTM083000.

If, rather than to a stand-alone lump sum, Peter’s entitlement is to a 25%+ lump sum, he will also become entitled to a pension in connection with which the lump sum has been paid.

For lifetime allowance purposes, a pension commencement lump sum crystallises before the crystallisation of the connected pension - see PTM088200. So Peter can still take £20,000 of his pension commencement lump sum free of tax with the remainder subject to the lifetime allowance charge. The whole of the value of the connected pension Peter receives will also be subject to the lifetime allowance charge of 25% - see PTM083000. This pension will still count as a relevant pension.

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How to pay protected lump sum benefits exceeding 25% where there has been a partial transfer out of rights after 5 April 2006 {#}

Paragraph 34 Schedule 36 Finance Act 2004

Articles 21 to 23 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

Where an individual makes a partial transfer out of a protected pension scheme the amount of protected pension commencement lump sum is reduced.

The current formula for the maximum pension commencement lump sum is

[VULSR x (ULA/FSLA)] + ALSA - TV/4

VULSR = the value of the individual’s uncrystallised lump sum rights under the scheme on 5 April 2006)

ULA = the greater of £1.8 million or the standard lifetime allowance when benefit entitlement arises

FSLA = £1.5 million.

ALSA = the additional lump sum amount in respect of the increase in the value of benefits after 5 April 2006 (see above)

TV = the value of the sums and assets transferred out of the scheme after 5 April 2006.

Applying this formula results in the amount of the protected lump sum in the transferring scheme being lower than might have been the case had the transfer not taken place.  This is because one quarter of the transfer value is deducted as part of the calculation, and also because the figure taken into account for ALSA reflects the fact that the value of the member’s rights or benefits in the transferring scheme is lower than would have been the case had there been no transfer.

Where an individual’s right under a protected pension scheme are reduced due to the transfer out of a pension debit, the individual’s protected lump sum rights remain unchanged. This is because a transfer involves the moving of an individual’s accrued pension rights from one scheme to another of the responsibility to pay the member the benefits to which they are entitled, see PTM029000. A pension debit is the amount by which the value of the original member’s pension rights are reduced, with a corresponding pension credit by which the ex-spouse’s or former civil partner’s pension rights are increased. As the member has no right to benefits in relation to a pension credit, the transfer-out of a pension debit is not a transfer for pension tax purposes.

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Stand-alone lump sums

Articles 25 to 25D The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

A pension commencement lump sum cannot be paid where all the benefits are being paid in lump sum form. This is because paragraph 1(1)(a) Schedule 29 requires a pension commencement lump sum to be paid in connection with an entitlement to a pension.

Where on 5 April 2006 an individual was a member of a scheme under which they were entitled to take all their uncrystallised rights as a lump sum, the individual can still receive all their benefits in lump sum form if certain conditions are met. Where such a lump sum is paid, the lump sum is called a stand-alone lump sum.

A stand-alone lump sum can be paid from a scheme with scheme-specific protection of lump sums where:

  • the member has reached the normal minimum pension age (or any earlier protected pension age they may have under the scheme - see PTM062200) or is taking benefits earlier due to ill-health - see PTM062100, the entitlement to the lump sum is a single benefit crystallisation event that crystallises all of the member’s rights under the scheme that had not crystallised before 6 April 2006,
  • there has been no relevant benefit accrual (see PTM092430) for the individual under the scheme after 5 April 2006,
  • the member did not have lump sum rights of more than £375,000 on 5 April 2006 where either primary or enhanced protection applies when the lump sum is paid (if the individual did have lump sum rights of more than £375,000 on 5 April 2006, see the guidance at PTM063110 for the circumstances in which a stand alone lump sum can be paid),
  • on 5 April 2006, all the member’s uncrystallised rights (calculated in accordance with PTM063140) under the scheme and any other scheme within paragraph 1(1) (a) - (e) Schedule 36 relating to the same employment could have been paid out as a tax-free lump sum, and
  • the total value of the member’s uncrystallised lump sum rights lump sum provided under all schemes within paragraph 1(1) (a) - (e) Schedule 36 relating to the same employment (calculated as per the previous bullet point) was not more than the maximum permitted lump sum as described in PTM063140 (description for non-statutory schemes).

Payment of a stand-alone lump sum is a benefit crystallisation event. It falls within benefit crystallisation event 6 (just as a pension commencement lump sum does). This means that all or part of the stand-alone lump sum is liable to the lifetime allowance charge if the individual does not have enhanced protection or enough available lifetime allowance to cover the payment - see PTM081000. Apart from this a stand-alone lump sum can be paid tax free, just like a pension commencement lump sum - see PTM063210.

Transfers

Transfers into or out of a registered pension scheme under which the member has the right to a stand-alone lump sum may cause the member to lose their right to a stand-alone lump sum. PTM063150 explains what transfers will cause the individual to lose their right to a stand-alone lump sum.

Amount of stand-alone lump sum

There is no set upper limit on the amount of stand-alone lump sum:

  • Other money purchase arrangements can pay a stand-alone lump sum that includes the full investment return on the value of the lump sum rights as at 5 April 2006. This can happen even though this is more than the 5 April 2006 value indexed in line with the standard lifetime allowance.
  • Defined benefits or cash balance arrangements can pay a stand-alone lump sum up to the appropriate limit. (PTM092430 explains what the appropriate limit is.)