Finance Act 2004

Pension commencement lump sum U.K.

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

[F1 (a) the member becomes entitled to it before reaching the age of 75,

(aa) the member becomes entitled to it in connection with becoming entitled to a relevant pension (or dies after becoming entitled to it but before becoming entitled to the relevant pension in connection with which it was anticipated that the member would become entitled to it)]

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

(c) it is paid within the period [F2 beginning six months before, and ending one year after,] 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),

F3 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 [F4 , otherwise than by virtue of the operation of paragraph 8(2) of Schedule 28, under the pension scheme] 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 [F5 at a time not earlier than when the member reaches the age of 60 and not later than when the member reaches the age of 65], 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.

[F6 (6) The Board of Inland Revenue may by regulations provide that, where incorrect income tax has been paid by the scheme administrator in relation to the member by way of the lifetime allowance charge in circumstances prescribed by the regulations, a lump sum subsequently paid to the member in circumstances so prescribed is to be treated as a pension commencement lump sum even though either or both of the conditions in sub-paragraph [F7 (1)(a) and (c)] are not met.]

Textual Amendments

F1 Sch. 29 para. 1(1)(a)(aa) substituted (retrospective to 6.4.2006) for Sch. 29 para. 1(1)(a) by Finance Act 2007 (c. 11), Sch. 20 paras. 11(2)(a), 24(3)

F2 Words in Sch. 29 para. 1(1)(c) substituted (retrospective to 6.4.2006) by Finance Act 2007 (c. 11), Sch. 20 paras. 11(2)(b), 24(3)

F3 Words in Sch. 29 para. 1(1)(e) omitted (retrospective to 6.4.2006) by virtue of Finance Act 2007 (c. 11), Sch. 20 paras. 11(2)(c), 24(3)

F4 Words in Sch. 29 para. 1(3)(b) substituted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 34(2), 64(1)

F5 Words in Sch. 29 para. 1(4)(a) substituted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 21

F6 Sch. 29 para. 1(6) inserted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 34(3), 64(1)

F7 Words in Sch. 29 para. 1(6) substituted (retrospective to 6.4.2006) by Finance Act 2007 (c. 11), Sch. 20 paras. 11(3), 24(3)

Modifications etc. (not altering text)

C1 Sch. 29 modified (6.4.2006) by The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 (S.I. 2006/207), regs. 1(1), 15

C2 Sch. 29 Pt. 1 modified (6.4.2006) by The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (S.I. 2006/572), arts. 1(1), 25(1)(2)(4)

C3 Sch. 29 Pt. 1 applied (with modifications) (6.4.2006) by The Pension Protection Fund (Tax) Regulations 2006 (S.I. 2006/575), regs. 1, 11

C4 Sch. 29 para. 1 modified (6.4.2006) by The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (S.I. 2006/572), arts. 1(1), 28

C5 Sch. 29 para. 1(1) modified (6.4.2006) by The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (S.I. 2006/572), arts. 1(1), 18

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

(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.

[F8 (5A) But if the member dies before becoming entitled to the relevant pension in connection with which it was anticipated that the member would become entitled to the lump sum, the permitted maximum is the available portion of the member's lump sum allowance.]

(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 [F9 relevant amount in the case of] 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).

[F10 (6A) Subject to sub-paragraph (6B), the relevant amount in the case of a benefit crystallisation event is the amount crystallised by it.

(6B) If the benefit crystallisation event is becoming entitled to a scheme pension under a money purchase arrangement, the relevant amount in the case of the benefit crystallisation event 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 or provision of the scheme pension and any related dependants' scheme pension.]

(7) The adjustment of [F11 the relevant amount in the case of] 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.

Textual Amendments

F8 Sch. 29 para. 2(5A) inserted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 11(4), 24(3)

F9 Words in Sch. 29 para. 2(6) substituted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 23(2)

F10 Sch. 29 para. 2(6A)(6B) inserted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 23(3)

F11 Words in Sch. 29 para. 2(7) substituted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 23(4)

Modifications etc. (not altering text)

C6 Sch. 29 para. 2(6) modified (6.4.2006) by The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (S.I. 2006/572), arts. 1(1), 19

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

(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 [F12 of the lifetime annuity and any related dependants' annuity], but subject to sub-paragraph (5).

[F13 (4A) For the purposes of this Part a dependants' annuity is related to a lifetime annuity payable to a member of a registered pension scheme—

(a) if they are purchased either in the form of a joint life annuity or separately in circumstances in which the day on which the one is purchased is no earlier than seven days before, and no later than seven days after, the day on which the other is purchased, and

(b) the dependant's annuity will be payable to a dependant of the member.]

[F14 (5) There is to be deducted from that aggregate—

(a) if the sums or assets applied in (or in connection with) the purchase of the annuity or any related dependants' annuity consist of or include 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 sums or assets applied in (or in connection with) the purchase of the annuity or any related dependants' annuity as represents rights which are attributable to a disqualifying pension credit.]

(6) Where the member becomes entitled to a scheme pension [F15 under a defined benefits arrangement], 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) [F16 (disregarding paragraph 3 of Schedule 32)].

[F17 (7A) Where the member becomes entitled to a scheme pension under a money purchase arrangement, the applicable amount is one third of the scheme pension purchase price.

(7B) “The scheme pension 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 or provision of the scheme pension and any related dependants' scheme pension, but subject to sub-paragraph (8).

(7C) For the purposes of this Part a dependants' scheme pension is related to a scheme pension payable to a member of a registered pension scheme if—

(a) the day on which one is purchased or sums or assets are applied for its provision is no earlier than seven days before, and no later than seven days after, the day on which the other is purchased or sums or assets are applied for its provision, and

(b) the dependants' scheme pension will be payable to a dependant of the member.]

(8) There is to be deducted from the aggregate of the amount of the lump sum and the amount crystallised [F18 or from the scheme pension purchase price]—

(a) if the scheme pension is funded (in whole or in part) by the [F19 application] 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 [F20 or of the scheme pension purchase price] as represents rights which are attributable to a disqualifying pension credit.

[F21 (9) Sub-paragraph (10) applies if—

(a) sums or assets held for the purposes of, or representing accrued rights under, a money purchase arrangement relating to the member under a registered pension scheme (“member money purchase funds”) are subject to a relevant surrender or a relevant transfer,

(b) the sole or main purpose of the relevant surrender or relevant transfer is to increase the applicable amount on the member becoming entitled to a scheme pension, and

(c) the member becomes entitled to a scheme pension under a relevant defined benefits arrangement.

(10) The pension scheme under which the relevant defined benefits arrangement is an arrangement is to be treated as making an unauthorised payment to the member of any amount by which—

(a) the applicable amount in relation to the scheme pension under sub-paragraph (6), exceeds

(b) the amount which would be that applicable amount under sub-paragraph (7A) if the arrangement were a money purchase arrangement.

(11) For the purposes of sub-paragraph (9)—

(a) member money purchase funds are subject to a relevant surrender if they are surrendered and, in consequence of the surrender, there is a corresponding increase in the sums or assets held for the purposes of, or representing rights under, a defined benefits arrangement relating to the member under the pension scheme (or such an arrangement is established), and

(b) member money purchase funds are subject to a relevant transfer if they are transferred so as to become held for the purposes of, or to represent rights under, a defined benefits arrangement relating to the member under any other registered pension scheme.

(12) In sub-paragraphs (9) and (10) “relevant defined benefits arrangement” means—

(a) the defined benefits arrangement mentioned in paragraph (a) or (b) of sub-paragraph (11), or

(b) any other defined benefits arrangement relating to the member (under the pension scheme or any other registered pension scheme) in the case of which any of the sums or assets held for the purposes of, or representing accrued rights under, the arrangement directly or indirectly represent sums or assets previously held for the purposes of, or representing accrued rights under, the defined benefits arrangement so mentioned.]

Textual Amendments

F12 Words in Sch. 29 para. 3(4) substituted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 30(2), 64(1)

F13 Sch. 29 para. 3(4A) inserted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 30(3), 64(1)

F14 Sch. 29 para. 3(5) substituted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 35(2), 64(1)

F15 Words in Sch. 29 para. 3(6) inserted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 22(2)

F16 Words in Sch. 29 para. 3(7) inserted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 35(3), 64(1)

F17 Sch. 29 para. 3(7A)-(7C) inserted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 22(3)

F18 Words in Sch. 29 para. 3(8) inserted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 22(4)(a)

F19 Word in Sch. 29 para. 3(8) substituted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 24, 64(1)

F20 Words in Sch. 29 para. 3(8) inserted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 22(4)(b)

F21 Sch. 29 para. 3(9)-(12) inserted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 161(2), Sch. 23 para. 22(5)

[F22 3A (1) Where this paragraph applies in relation to a pension commencement lump sum paid to the member, the pension scheme is to be treated as making to the member an unauthorised payment of the appropriate amount. U.K.

(2) Subject to sub-paragraphs (3) and (4), this paragraph applies in relation to a pension commencement lump sum if—

(a) because of the lump sum, the amount of the contributions paid by or on behalf of, or in respect of, the member to the pension scheme, or to any other registered pension scheme, is significantly greater than it otherwise would be, and

(b) the member envisaged at the relevant time that that would be so.

(3) This paragraph does not apply in relation to any lump sum paid to the member on any day if the amount of the lump sum, when added to any other pension commencement lump sum paid to the member within the period of 12 months ending with that day, does not exceed 1% of the standard lifetime allowance on that day.

(4) This paragraph does not apply if the amount by which the contributions paid as mentioned in sub-paragraph (2)(a) is greater than it otherwise would be because of the lump sum does not exceed 30% of the amount of the lump sum.

(5) “The appropriate amount” is so much of—

(a) the amount crystallised by the benefit crystallisation event constituted by the payment of the lump sum, as does not exceed

(b) the amount of the member's lifetime allowance which is available on it.

(6) “The relevant time” is—

(a) if paragraph (a) of sub-paragraph (2) is satisfied before the lump sum is paid, the time when that paragraph is first satisfied, and

(b) otherwise, the time when the lump sum is paid.]

Textual Amendments

F22 Sch. 29 para. 3A inserted (retrospective to 6.4.2006) by Finance Act 2006 (c. 25), s. 159(1)(2)