Finance Act 2004

Part 1 Lump sum rule

Pension commencement lump sum

1 (1) For the purposes of this Part a lump sum is a pension commencement lump sum if—

(a) the member becomes entitled to it in connection with the member becoming entitled to a relevant pension,

(b) it is paid when all or part of the member’s lifetime allowance is available,

(c) it is paid within the period of three months beginning with the day on which the member becomes entitled to it,

(d) it is paid when the member has reached normal minimum pension age (or the ill-health condition is satisfied),

(e) it is paid when the member has not reached the age of 75, and

(f) it is not an excluded lump sum (see sub-paragraph (4)).

(2) But if a lump sum falling within sub-paragraph (1) exceeds the permitted maximum, the excess is not a pension commencement lump sum.

(3) A pension is a relevant pension if—

(a) it is income withdrawal, a lifetime annuity or a scheme pension, and

(b) the member becomes entitled to it under the arrangement under which the member becomes entitled to the lump sum.

(4) A lump sum is an excluded lump sum if—

(a) the pension in connection with which the member becomes entitled to it is a scheme pension the rate of which is to reduce (or which is to cease to be payable) in accordance with paragraph 2(4)(c) of Schedule 28 when the member becomes entitled to state retirement pension, and

(b) the sole or main purpose of making provision for the pension to be such a pension was to increase the member’s entitlement to a lump sum on which there is no liability to income tax.

(5) Paragraph 2 defines the permitted maximum.

2 (1) If sub-paragraph (2) applies, the permitted maximum is nil.

(2) This sub-paragraph applies if all the member’s rights under the arrangement under which the member becomes entitled to the relevant pension are attributable to a disqualifying pension credit.

(3) A pension credit is disqualifying if, when the member becomes entitled to it, the person subject to the corresponding pension debit has an actual (rather than a prospective) right to payment of a pension under the relevant arrangement.

(4) The relevant arrangement is the arrangement to which the pension sharing order or provision, by virtue of which the member becomes entitled to the pension credit, relates.

(5) If sub-paragraph (2) does not apply, the permitted maximum is the lower of—

(a) the available portion of the member’s lump sum allowance, and

(b) the applicable amount, calculated in accordance with paragraph 3.

(6) The available portion of the member’s lump sum allowance is—

where—

• CSLA is the current standard lifetime allowance, and

• AAC is the aggregate of 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, as adjusted under sub-paragraph (7) (and if no such benefit crystallisation event has occurred, is nil).

(7) The adjustment of an amount crystallised by a previous benefit crystallisation event referred to in the definition of AAC is the multiplication of the amount by—

where—

• CSLA is the current standard lifetime allowance, and

• PSLA is the standard lifetime allowance at the time of the previous benefit crystallisation event.

(8) If the amount given by sub-paragraph (6) is negative, no portion of the member’s lump sum allowance is available.

3 (1) Where the member becomes entitled to income withdrawal, the applicable amount is one third of the aggregate of—

(a) the amount of the sums designated as available for the payment of unsecured pension on that occasion, and

(b) the market value of the assets so designated,

but subject to sub-paragraph (2).

(2) Any of the sums and assets so designated which represent rights attributable to a disqualifying pension credit are to be disregarded.

(3) Where the member becomes entitled to a lifetime annuity, the applicable amount is one third of the annuity purchase price.

(4) “The annuity purchase price” is the aggregate of—

(a) the amount of such of the sums held for the purposes of the pension scheme, and

(b) the market value of such of the assets held for the purposes of the pension scheme,

as are applied in (or in connection with) the purchase of the annuity, but subject to sub-paragraph (5).

(5) Any of the sums and assets applied in (or in connection with) the purchase of the annuity which—

(a) have been designated as available for the payment of unsecured income, or

(b) represent rights which are attributable to a disqualifying pension credit,

are to be disregarded.

(6) Where the member becomes entitled to a scheme pension, the applicable amount is—

but subject to sub-paragraph (8).

(7) In sub-paragraph (6)—

• LS is the amount of the lump sum, and

• AC is the amount crystallised by reason of the member becoming entitled to the pension (see section 216).

(8) There is to be deducted from the aggregate of the amount of the lump sum and the amount crystallised—

(a) if the scheme pension is funded (in whole or in part) by the surrender of sums or assets representing the whole or part of the member’s unsecured pension fund, the aggregate of the amount of those sums and the market value of those assets, and

(b) in any case, so much (if any) of the aggregate of the lump sum and the amount crystallised as represents rights which are attributable to a disqualifying pension credit.

Serious ill-health lump sum

4 (1) For the purposes of this Part a lump sum is a serious ill-health lump sum if—

(a) before it is paid the scheme administrator has received evidence from a registered medical practitioner that the member is expected to live for less than one year,

(b) it is paid when all or part of the member’s lifetime allowance is available,

(c) it is paid in respect of an uncrystallised arrangement,

(d) it extinguishes the member’s entitlement to benefits under the arrangement, and

(e) it is paid when the member has not reached the age of 75.

(2) An uncrystallised arrangement is an arrangement in respect of which there has been no previous benefit crystallisation event.

Short service refund lump sum

5 (1) For the purposes of this Part a lump sum is a short service refund lump sum if—

(a) the pension scheme is an occupational pension scheme,

(b) the member’s pensionable service was terminated before normal pension age but the member is not entitled to short service benefit by virtue of section 71 of the Pension Schemes Act 1993 (c. 48) (basic principle as to short service benefit),

(c) there has been no previous benefit crystallisation event in relation to the member and the pension scheme,

(d) it extinguishes the member’s entitlement to benefits under the pension scheme, and

(e) it is paid when the member has not reached the age of 75.

(2) But if a lump sum falling within sub-paragraph (1) exceeds an amount equal to the aggregate of the member’s contributions under the pension scheme, the excess is not a short service refund lump sum.

(3) “Pensionable service”, “normal pension age” and “short service benefit” have the same meaning as in the Pension Schemes Act 1993 (see section 181 (1) of that Act).

Refund of excess contributions lump sum

6 (1) A lump sum is a refund of excess contributions lump sum if—

(a) it is paid in respect of a tax year in which the excess contributions condition is met in respect of the member, and

(b) it is paid before the end of the period of six years beginning with the last day of the tax year in respect of which it is paid.

(2) But if a lump sum falling within sub-paragraph (1) exceeds the member’s available excess contributions allowance for the tax year in respect of which it is paid, the excess is not a refund of excess contributions lump sum.

(3) The excess contributions condition is met in respect of a member and a tax year if the amount of relievable pension contributions (see section 188(2) and (3)) paid in respect of the member in the tax year exceeds the maximum amount of relief to which the member is entitled for the tax year under section 190 (annual limit for relief).

(4) If no refund of excess contributions lump sum has been paid to the member in respect of a tax year (by any registered pension scheme), the available excess contributions allowance for that tax year is—

RPC - MAR

(5) If one or more refund of excess contributions lump sums have been paid to the member in respect of a tax year, the available excess contributions allowance for that tax year is—

RPC - MAR - ALS

or, if the amount resulting from that calculation is negative, is nil.

(6) In this paragraph—

• RPC is the amount of the relievable pension contributions paid in respect of the member in the tax year,

• MAR is the maximum amount of relief to which the member is entitled for the tax year under section 190, and

• ALS is the aggregate of the refund of excess contributions lump sums previously paid to the member in respect of the tax year.

Trivial commutation lump sum

7 (1) For the purposes of this Part a lump sum is a trivial commutation lump sum if—

(a) it is paid when no trivial commutation lump sum has previously been paid to the member (by any registered pension scheme) or, if such a lump sum has previously been paid, before the end of the commutation period,

(b) on the nominated date, the value of the member’s pension rights does not exceed the commutation limit,

(c) it is paid when all or part of the member’s lifetime allowance is available,

(d) it extinguishes the member’s entitlement to benefits under the pension scheme, and

(e) it is paid when the member has reached the age of 60 but has not reached the age of 75.

(2) The commutation period is the period beginning with the day on which a trivial commutation lump sum is first paid to the member and ending 12 months after that day.

(3) The nominated date is the day within the period of three months ending with the first day of the commutation period nominated by the member (or, if no date is nominated, is the first day of the commutation period).

(4) The commutation limit is 1% of the standard lifetime allowance on the nominated date.

(5) The value of the member’s pension rights on the nominated date is the aggregate of—

(a) the value of the member’s relevant crystallised pension rights on that date (calculated in accordance with paragraph 8), and

(b) the value of the member’s uncrystallised rights on that date (calculated in accordance with paragraph 9).

8 (1) The value of the member’s relevant crystallised pension rights on the nominated date is the aggregate of—

(a) the value of the member’s relevant crystallised pension rights on 5th April 2006, calculated in accordance with paragraph 10 of Schedule 36 (as if the member were the individual mentioned there), as adjusted under sub-paragraph (2), and

(b) the aggregate of the amounts crystallised on benefit crystallisation events in the period beginning with 6th April 2006 and ending with the nominated date, as adjusted under sub-paragraph (3).

(2) The adjustment referred to in sub-paragraph (1)(a) is the multiplication of the value of the member’s relevant crystallised pension rights on 5th April 2006 by—

where—

• SLAN is the standard lifetime allowance on the nominated date, and

• FSLA is £1,500,000 (the standard lifetime allowance for the tax year 2006-07).

(3) The adjustment referred to in sub-paragraph (1)(b) is the multiplication of the amount crystallised by a previous benefit crystallisation event by—

where—

• SLAN is the standard lifetime allowance on the nominated date, and

• PSLA is the standard lifetime allowance when the previous benefit crystallisation event occurred.

9 (1) The value of the member’s uncrystallised rights on the nominated date is the aggregate value of the member’s uncrystallised rights on that date under each arrangement relating to the member under a registered pension scheme.

(2) The value on the nominated date of the member’s uncrystallised rights under such an arrangement is to be calculated in accordance with section 212 (valuation of uncrystallised rights for purposes of section 210).

Winding-up lump sum

10 (1) For the purposes of this Part a lump sum is a winding-up lump sum if—

(a) the pension scheme is an occupational pension scheme,

(b) the pension scheme is being wound-up,

(c) the member’s employer meets the conditions in sub-paragraph (3),

(d) it is paid when all or part of the member’s lifetime allowance is available,

(e) it extinguishes the member’s entitlement to benefits under the pension scheme, and

(f) it is paid when the member has not reached the age of 75.

(2) But if a lump sum falling within sub-paragraph (1) exceeds 1% of the standard lifetime allowance when the lump sum is paid, the excess is not a winding-up lump sum.

(3) The conditions are that the employer—

(a) has made contributions under the pension scheme in respect of the member,

(b) is not making contributions under any other registered pension scheme in respect of the member, and

(c) undertakes to the Inland Revenue not to make such contributions during the period of one year beginning with the day on which the lump sum is paid.

Lifetime allowance excess lump sum

11 For the purposes of this Part a lump sum is a lifetime allowance excess lump sum if—

(a) it is paid when none of the member’s lifetime allowance is available,

(b) it is not a short service refund lump sum or a refund of excess contributions lump sum,

(c) it does not reduce the rate of payment of any pension to which the member has become (actually) entitled, or extinguish the member’s entitlement to payment of any such pension,

(d) it is paid when the member has reached normal minimum pension age (or the ill-health condition is met), and

(e) it is paid when the member has not reached the age of 75.

Interpretation of Part 1

12 (1) Expressions used in this Part of this Schedule and in Schedule 28 have the same meaning in this Part of this Schedule as in Schedule 28.

(2) Where all or part of the member’s lifetime allowance is available immediately before a lump sum is paid, sub-paragraph (3) applies to the lump sum if—

(a) its amount exceeds the member’s available lifetime allowance, and

(b) but for that fact, it would satisfy all the requirements of paragraph 1(1), 4(1), 7 (1) or 10(1).

(3) For the purposes of this Schedule, the whole of the lump sum (and not only so much of it as does not exceed the member’s available lifetime allowance) is to be treated as paid when all or part of the member’s lifetime allowance is available.

(4) But sub-paragraph (3) does not apply—

(a) in the case of a lump sum that would satisfy all the requirements of paragraph 1(1), to so much of it as would be prevented from being a pension commencement lump sum by paragraph 1(2), and

(b) in the case of a lump sum that would satisfy all the requirements of paragraph 10(1), to so much of it as would be prevented from being a winding-up lump sum by paragraph 10(2).

(5) Where by virtue of paragraph 1(2), 5(2), 6(2) or 10(2) an excess is not an authorised lump sum of one description, that does not prevent the excess being an authorised lump sum of another description.

(6) “Authorised lump sum” means a lump sum authorised to be paid by the lump sum rule.