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HMRC internal manual

Pensions Tax Manual

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Member benefits: lump sums: uncrystallised funds pension lump sum (UFPLS)

Glossary PTM000001
   

What is an uncrystallised funds pension lump sum
Conditions for an uncrystallised funds pension lump sum
When a lump sum cannot be paid as an uncrystallised funds pension lump sum
Uncrystallised funds pension lump sum and the lifetime allowance
Taxation of an uncrystallised funds pension lump sum

What is an uncrystallised funds pension lump sum

Section 165(1) Finance Act 2004

From 6 April 2015, an uncrystallised funds pension lump sum can be paid as an authorised member payment to a member from uncrystallised funds held in a money purchase arrangement for that member. Uncrystallised funds are funds held in respect of the member which have not, as yet, been used to provide that member with a benefit under the scheme (so have not crystallised for lifetime allowance purposes). If the money purchase arrangement is a cash balance arrangement, uncrystallised funds in the arrangement are the funds there would be in the arrangement if the member decided to draw benefits on a particular date, not the funds actually held in the cash balance arrangement at that time.

The tax rules do not limit the number of uncrystallised funds pension lump sums that can be taken from uncrystallised funds held in a money purchase arrangement. Depending on the rules of the registered pension scheme in which the arrangement is held, the member can take their entire uncrystallised funds as a single lump sum or as a number of lump sums spread over a period of time, or they could take one or more uncrystallised funds pension lump sums from some of the funds in the arrangement, with the remainder having been or intended to be used to provide some other form of benefit e.g. a lifetime annuity.

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Conditions for an uncrystallised funds pension lump sum

Paragraph 4A Schedule 29 Finance Act 2004

To be an uncrystallised funds pension lump sum, a lump sum must:

  • be paid on or after 6 April 2015 in relation to a money purchase arrangement
  • be paid when all or part of the member’s lifetime allowance is available (see PTM081000)
  • be paid when the member has reached the normal minimum pension age of 55 (or an earlier age if the member meets the ill-health condition (see PTM062100) or has a protected pension age (see PTM062210)
  • not be a pension commencement lump sum (see PTM063210)
  • not be a lump sum that is treated for tax purposes as a trivial commutation lump sum by regulations (see PTM063700)
  • satisfy the requirement that immediately before the member becomes entitled to the lump sum, the sums and assets used to provide it must represent uncrystallised rights of the member as defined by sections 212(1) and (2) Finance Act 2004.

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When a lump sum cannot be paid as an uncrystallised funds pension lump sum

Paragraph 2(3) and (4) and paragraph 4A(1)(f) and (g) Schedule 29 Finance Act 2004

A lump sum cannot be an uncrystallised funds pension lump sum in the following circumstances:

  • If the sums and assets used to provide it represent, to any extent, a disqualifying pension credit. A pension credit is a disqualifying pension credit if at the time the pension credit was created, the member’s ex-spouse or former civil partner’s pension that was being shared with the member was actually in payment. The reason for this is that where a pension in payment is split through a pension sharing order (see PTM029000), when that pension first came into payment, the original member (the pension debit member) will or could have taken a tax-free lump sum in respect of those benefits. So it is not appropriate to allow a lump sum to be taken when the pension credit rights come into payment. This applies regardless of whether or not a lump sum was actually taken by the pension debit member.
  • To the extent that the lump sum exceeds the member’s available lifetime allowance. This will occur where the lump sum is paid before the member reaches age 75 and meets the conditions for an uncrystallised funds pension lump sum (see above) but the amount of the lump sum exceeds the member’s available lifetime allowance. It is only the excess that is not an uncrystallised funds pension lump sum - the amount of the lump sum equal to the member’s available lifetime allowance will still be payable as an uncrystallised funds pension lump sum.
  • If immediately before the lump sum is paid the member has valid enhanced protection, with or without dormant primary protection, and the member also has protection for lump sum rights which exceeded £375,000 on 5 April 2006 (see PTM063120).
  • If the member has valid primary protection immediately before the lump sum is paid and the member also has protection for lump sum rights which exceeded £375,000 on 5 April 2006 (see PTM063110).
  • The member has a lifetime allowance enhancement factor (see PTM095000) immediately before the lump sum is paid and the available portion of their lifetime allowance is nil or less than 25% of the sum being paid.

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Uncrystallised funds pension lump sum and the lifetime allowance

Sections 166(2)(aa), 215 and 216 and paragraph 15 Schedule 32 Finance Act 2004

One of the conditions for a lump sum to be an uncrystallised funds pension lump sum is that the member must have lifetime allowance available. This is because the payment of an uncrystallised funds pension lump sum is a benefit crystallisation event for lifetime allowance purposes through BCE 6 if it is paid to a member who has not reached the age of 75 (see PTM088670). So the more that is paid, the more that crystallises for lifetime allowance purposes. A member becomes entitled to an uncrystallised funds pension lump sum immediately before it is paid so that is when the BCE 6 occurs in relation to it.

There is no limit on the amount of an uncrystallised funds pension lump sum so whilst the member must have available lifetime allowance in order for an uncrystallised funds pension lump sum to be paid, the level of lump sum paid is not limited by the level of available lifetime allowance that the member actually has (as, for example, a pension commencement lump sum would be). Where the amount crystallising exceeds the available lifetime allowance the excess can still be paid as an authorised lump sum payment as a lifetime allowance excess lump sum. This creates a chargeable amount i.e. an amount that is liable to the lifetime allowance charge (see PTM084000).

The lifetime allowance excess lump sum is also a BCE 6. The lifetime allowance charge is due at the rate of 55%. The scheme administrator must account for the tax due, so they are likely to deduct this charge before paying the uncrystallised funds pension lump sum to the member (i.e. the payment will be made net of the 55% lifetime allowance charge).

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Taxation of an uncrystallised funds pension lump sum

Sections 579A and 636A Income Tax (Earnings and Pensions) Act 2003

Paragraph 12(1A) Schedule 29 Finance Act 2004

Where the member has not reached age 75, an uncrystallised funds pension lump sum is taxed as follows:

  • 25% is not liable to tax, i.e. it is paid tax-free
  • 75% is taxed as pension income in the same way as a pension paid under a registered pension scheme. This means that the payer of the lump sum will deduct and account for income tax under the requirements of the PAYE regulations (see PTM024600).

Where the member has reached age 75, an uncrystallised funds pension lump sum is taxed as follows:

  1. If the amount of the uncrystallised funds pension lump sum does not exceed the member’s available lifetime allowance at the time it is paid, it is taxed in the same way as an uncrystallised funds pension lump sum paid to a member who has not reached age 75 (see above)
  2. If the lump sum exceeds the member’s available lifetime allowance at the time the lump sum was paid then
* that part of the lump sum equal to 25% of the member’s available lifetime allowance at the time it is paid is not liable to tax, i.e. it is paid tax-free
* the rest of the lump sum is taxed as pension income in the same way as a pension paid under a registered pension scheme. This means that the payer of the lump sum will deduct and account for income tax under the requirements of the PAYE regulations.

Where the uncrystallised funds pension lump sum is paid after the member has reached age 75, then when calculating the amount of the member’s available lifetime allowance at the time the lump sum is paid, any lifetime allowance used up by a BCE 5 or BCE 5B (see PTM088650) that occurred earlier in respect of the member is not taken into account. On the other hand, if either (1) an event has previously occurred in relation to the member that would have been a BCE but for the fact that it occurred after the member had reached age 75 or (2) the member received a pension commencement lump sum from a money purchase arrangement and their entitlement to the lump sum arose before they reached age 75 but it was not paid until after they had reached that age, the member’s available lifetime allowance is calculated as though that event had been a BCE i.e. for this particular purpose only, the event is treated as using up lifetime allowance.