Finance Act 2004

12 (1) This paragraph applies on and after 6th April 2006 in the case of an individual who has one or more relevant existing arrangements if notice of intention to rely on it is given to the Inland Revenue in accordance with regulations made by the Board of Inland Revenue. U.K.

(2) But this paragraph ceases to apply if [F1 the notice under sub-paragraph (1) is given on or after 15 March 2023 and]—

(a) relevant benefit accrual occurs under the arrangement, or any of the arrangements (see paragraph 13),

[F2 (aa) there is an impermissible transfer into the arrangement or any of the arrangements (see paragraph 17A),]

(b) a transfer of sums or assets held for the purposes of, or representing accrued rights under, the arrangement or any of the arrangements is made that is not a permitted transfer, or

(c) an arrangement relating to the individual is made under a registered pension scheme otherwise than [F3 in permitted circumstances].

[F4 (2A) An arrangement is made in permitted circumstances if it is made—

(a) for the purposes of a permitted transfer,

(b) as part of a retirement-benefit activities compliance exercise, or

(c) as part of an age-equality compliance exercise.

(2B) For the purposes of sub-paragraph (2A)(b) an arrangement (“the new arrangement”) relating to an individual is made as part of a retirement-benefit activities compliance exercise if—

(a) it is made in connection with the cancellation of rights under another arrangement relating to the individual (“the old arrangement”),

(b) the old arrangement and the new arrangement relate to the same employment,

(c) there is a prospective entitlement to pension death benefits within section 167(1) or lump sum death benefits within section 168(1) (or both) under both the old arrangement and the new arrangement,

(d) the making of the new arrangement and the cancellation of the old arrangement constitute or form part of a transaction the purpose of which is to secure that the activities of the pension scheme under which the arrangement is made are limited to retirement-benefit activities within the meaning of section 255 of the Pensions Act 2004 or Article 232 of the Pensions (Northern Ireland) Order 2005, and

(e) the rights cancelled under the old arrangement and the rights conferred under the new arrangement are not significantly different.

(2C) For the purposes of sub-paragraph (2A)(c) an arrangement (“the new arrangement”) is made as part of an age-equality compliance exercise if—

(a) it is made in connection with the cancellation of rights under another arrangement relating to the individual (“the old arrangement”),

(b) the old arrangement and the new arrangement relate to the same employment,

(c) there is a prospective entitlement to pension death benefits within section 167(1) or lump sum death benefits within section 168(1) (or both) under both the old arrangement and the new arrangement, and

(d) the new arrangement is made, and the old arrangement cancelled, in order to comply with the [F5 Part 5 of the Equality Act 2010, so far as relating to age, or the] or Employment Equality (Age) Regulations (Northern Ireland) 2006 (or any regulations amending or replacing [F6 those Regulations]).]

[F7 (3A) Where this paragraph applies in the case of an individual, Chapter 15A of Part 9 of ITEPA 2003 (pension income: lump sums under registered pension schemes) and Part 4 of FA 2004 (pensions etc) have effect in relation to the individual with the modifications in sub-paragraphs (3B) to (3F).

(3B) For the purposes of determining the income tax treatment of a lump sum or a lump sum death benefit—

(a) section 637C of that Act (serious ill-health lump sums) has effect as if, in subsection (3) of that section (which defines the permitted maximum), for the words from “so much of” to the end there were substituted “the maximum amount of a serious ill-health lump sum that could have been paid to the individual on 5 April 2024 under the arrangement pursuant to which the individual becomes entitled to the serious ill-health lump sum”;

(b) section 637D of that Act (uncrystallised funds pension lump sums) has effect as if—

(i) in subsection (3) of that section (which defines the permitted maximum), for paragraph (b) there were substituted—

“(b) the maximum amount of an uncrystallised funds pension lump sum that could have been paid to the individual with no liability to income tax on 5 April 2024 under the arrangement pursuant to which the entitlement to the uncrystallised funds pension lump sum arises in respect of the individual.”;

(ii) after that subsection there were inserted—

“(4) But in a case where the individual has previously become entitled to a serious ill-health lump sum—

(a) subsection (3) does not apply, and

(b) in subsection (2) “the permitted maximum”, in relation to an uncrystallised funds pension lump sum paid to the member, is nil.”;

(c) section 637H of that Act (defined benefits lump sum death benefits) has effect as if, in subsection (7) of that section, in the definition of “the permitted maximum”, for the words from “so much of” to the end there were substituted “—

(a) the maximum amount of a defined benefits lump sum death benefit that could have been paid in respect of the individual on 5 April 2024 under the arrangement pursuant to which the entitlement to the defined benefits lump sum death benefit arises in respect of the individual, less

(b) the aggregate of the non-taxable amounts within the meaning given by section 637S(6) of each authorised lump sum death benefit (if any) previously paid in respect of the individual under that arrangement after that date;

or, if that produces a negative result, nil.”;

(d) section 637I of that Act (pension protection lump sum death benefits) has effect as if, in subsection (5) of that section, in the definition of “the permitted maximum”, for the words from “so much of” to the end there were substituted “—

(a) the maximum amount of a pension protection lump sum death benefit that could have been paid in respect of the individual on 5 April 2024 under the arrangement pursuant to which the entitlement to the pension protection lump sum death benefit arises in respect of the individual, less

(b) the aggregate of the non-taxable amounts within the meaning given by section 637S(6) of each authorised lump sum death benefit (if any) previously paid in respect of the individual under that arrangement after that date;

or, if that produces a negative result, nil.”;

(e) section 637J of that Act (uncrystallised funds lump sum death benefits) has effect as if, in subsection (7), in the definition of “the permitted maximum”, for the words from “so much of” to the end there were substituted “—

(a) the maximum amount of an uncrystallised funds lump sum death benefit that could have been paid in respect of the individual on 5 April 2024 under the arrangement pursuant to which the entitlement to the uncrystallised funds lump sum death benefit arises in respect of the individual, less

(b) the aggregate of the non-taxable amounts within the meaning given by section 637S(6) of each authorised lump sum death benefit (if any) previously paid in respect of the individual under that arrangement after that date;

or, if that produces a negative result, nil.”;

(f) section 637K of that Act (annuity protection lump sum death benefits) has effect as if, in subsection (5), in the definition of “the permitted maximum”, for the words from “so much of” to the end there were substituted “—

(a) the maximum amount of an annuity protection lump sum death benefit that could have been paid in respect of the individual on 5 April 2024 under the arrangement pursuant to which the entitlement to the annuity protection lump sum death benefit arises in respect of the individual, less

(b) the aggregate of the non-taxable amounts within the meaning given by section 637S(6) of each authorised lump sum death benefit (if any) previously paid in respect of the individual under that arrangement after that date;

or, if that produces a negative result, nil.”;

(g) section 637L of that Act (drawdown pension fund lump sum death benefits) has effect as if, in subsection (8), in the definition of “the permitted maximum”, for the words from “so much of” to the end there were substituted “—

(a) the maximum amount of a drawdown pension fund lump sum death benefit that could have been paid in respect of the individual on 5 April 2024 under the arrangement pursuant to which the entitlement to the drawdown pension fund lump sum death benefit arises in respect of the individual, less

(b) the aggregate of the non-taxable amounts within the meaning given by section 637S(6) of each authorised lump sum death benefit (if any) previously paid in respect of the individual under that arrangement after that date;

or, if that produces a negative result, nil.”;

(h) section 637M of that Act (flexi-access drawdown lump sum death benefits) has effect as if, in subsection (8), in the definition of “the permitted maximum”, for the words from “so much of” to the end there were substituted “—

(a) the maximum amount of a flexi-access drawdown lump sum death benefit that could have been paid in respect of the individual on 5 April 2024 under the arrangement pursuant to which the entitlement to the flexi-access drawdown lump sum death benefit arises in respect of the individual, less

(b) the aggregate of the non-taxable amounts within the meaning given by section 637S(6) of each authorised lump sum death benefit (if any) previously paid in respect of the individual under that arrangement after that date;

or, if that produces a negative result, nil.”;

(i) Schedule 29 to FA 2004 (pension commencement lump sum: definition of “permitted maximum”) has effect as if—

(i) in paragraph 2, sub-paragraph (c) were omitted;

(ii) after paragraph 2 there were inserted—

“2ZA In the case of an individual who has previously become entitled to a serious ill-health lump sum—

(a) paragraph 2 does not apply, and

(b) in paragraph 1 “the permitted maximum”, in relation to a lump sum, is nil.”

(3C) For the purposes of the modifications made by sub-paragraph (3B), the maximum amount of a serious ill-health lump sum or a lump sum death benefit that could have been paid in respect of an individual on 5 April 2024 under an arrangement that is a defined benefits arrangement is an amount equal to the appropriate limit, determined under paragraph 15(4), in relation to payment of the serious ill-health lump sum or the lump sum death benefit.

(3D) For the purposes of the modifications made by sub-paragraph (3B) “authorised lump sum death benefit” means a lump sum death benefit authorised to be paid by the lump sum death benefit rule.

(3E) Section 637P of ITEPA 2003 (individual’s lump sum allowance) applies as if the amount specified in that section were £375,000.

(3F) Section 637R of ITEPA 2003 (individual’s lump sum and death benefit allowance) applies as if the amount specified in that section were an amount equal to the value of the individual’s uncrystallised pension rights on 5 April 2024.

(3G) The Commissioners for His Majesty’s Revenue and Customs may by regulations make provision about how the value of the individual’s uncrystallised pension rights on 5 April 2024 is to be determined for the purposes of sub-paragraph (3F).

(3H) Where this paragraph applies in the case of an individual, for the purposes of this Part a lump sum is not an uncrystallised funds pension lump sum (see paragraph 4A of Schedule 29) if the lump sum condition (see paragraphs 24(2) and (3), 25 and 26 of this Schedule) is met in relation to the individual.]

(4) An individual has a relevant existing arrangement if—

(a) before 6th April 2006 an arrangement relating to the individual has been made under a pension scheme within paragraph 1(1), and

(b) the pension scheme becomes a registered pension scheme on that date.

(5) Notice of intention to rely on this paragraph in relation to the individual may not be given in a case where—

(a) the value of the uncrystallised rights of the individual on 5th April 2006 under an arrangement, or

(b) the aggregate of the values of the uncrystallised rights of the individual on 5th April 2006 under arrangements,

is arrived at in accordance with paragraph [F8 9(3)] unless such rights as, in accordance with regulations made by the Board of Inland Revenue, are to be treated as representing the relevant excess have been surrendered.

(6) In sub-paragraph (5) “the relevant excess” means the amount by which the value of—

(a) the individual’s uncrystallised rights, or

(b) the aggregate of the values of the individual’s uncrystallised rights,

as arrived at in accordance with paragraph 8 exceeds what it would be if arrived at under paragraph [F9 9(3)].

(7) For the purposes of this paragraph and paragraphs 13 and 15, a transfer of sums or assets held for the purposes of, or representing accrued rights under, an arrangement is a permitted transfer if—

(a) F10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) the sums or assets F11 . . . are transferred so that sub-paragraph (8) applies in relation to them, and

(c) the aggregate of the amount of [F12 the] sums and the market value of [F12 the] assets is, applying normal actuarial practice, equivalent before and after the transfer.

(8) This sub-paragraph applies in relation to sums or assets held for the purposes of, or representing accrued rights under, the arrangement if—

(a) they are transferred so as to become held for the purposes of a money purchase arrangement that is not a cash balance arrangement F13 . . . F13 . . .

(b) where the transfer occurs in connection with the winding up of the pension scheme under which the arrangement is made and the arrangement is a cash balance arrangement or a defined benefits arrangement, they are transferred so as to become held for the purposes of, or to represent rights under, a cash balance arrangement or defined benefits arrangement relating to the same employment as the arrangement and made under a registered pension scheme or recognised overseas pension scheme.

[F14 (c) where the arrangement is a cash balance arrangement or a defined benefits arrangement relating to a present or former employment, they are transferred in connection with a relevant business transfer so as to become held for the purposes of, or to represent rights under, a cash balance arrangement or defined benefits arrangement made under a registered pension scheme or recognised overseas pension scheme, or

(d) where the arrangement (“the old arrangement”) is a cash balance arrangement or a defined benefits arrangement, they are transferred as part of a retirement-benefit activities compliance exercise so as to become held for the purposes of, or to represent rights under, a cash balance arrangement or defined benefits arrangement (“the new arrangement”) relating to the same employment as the old arrangement and made under a registered pension scheme or recognised overseas pension scheme.]

[F15 (8A) For the purposes of sub-paragraph (8)(c) “relevant business transfer” means a transfer of an undertaking or a business (or part of an undertaking or a business) from one person to another—

(a) which involves the transfer of at least 20 employees, and

(b) in the case of which, if the transferor and the transferee are bodies corporate, they would not be treated as members of the same group for the purposes of [F16 Part 5 of the Corporation Tax Act 2010].

(8B) For the purposes of sub-paragraph (8)(d) sums or assets held for the purposes of, or representing accrued rights under, the old arrangement are transferred as part of a retirement-benefit activities compliance exercise if—

(a) there is a prospective entitlement to pension death benefits within section 167(1) or lump sum death benefits within section 168(1) (or both) under both the old arrangement and the new arrangement, and

(b) the transfer constitutes or forms part of a transaction the purpose of which is to secure that the activities of the pension scheme under which the old arrangement was made are limited to retirement-benefit activities within the meaning of section 255 of the Pensions Act 2004 or Article 232 of the Pensions (Northern Ireland) Order 2005.]

(9) Where there is a permitted transfer—

(a) if the transfer is a permitted transfer by virtue of sub-paragraph (8)(a), this paragraph (and paragraphs 13 [F17 , 14 and 17A(1) and (2)]) apply in relation to the arrangement F18 . . . to which the transfer is made, and

(b) if the transfer is a permitted transfer by virtue of sub-paragraph (8)(b) [F19 or (d)], this paragraph (and paragraphs 13 [F20 , 15 and 17A(3)] [F21 to 17]) apply as if the arrangement to which the transfer is made were the same as that from which it is made, [F22 and

(c) if the transfer is a permitted transfer by virtue of sub-paragraph (8)(c), this paragraph (and paragraphs 13, 15 to 17 and 17A(3)) apply as if the arrangement to which the transfer is made were the same as that from which it is made and (if the employment is transferred) as if the employment with the transferee were the employment with the transferor.]

[F23 (10) The Treasury may by order amend sub-paragraph (8) (and make other amendments consequential on any amendment of that sub-paragraph).]

Textual Amendments

F1 Words in Sch. 36 para. 12(2) inserted (for the tax year 2023-24 and subsequent tax years) by Finance (No. 2) Act 2023 (c. 30), s. 23(2)(8)

F2 Sch. 36 para. 12(2)(aa) inserted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 53(3), 64(1)

F3 Words in Sch. 36 para. 12(2)(c) substituted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(2), 24(3)

F4 Sch. 36 para. 12(2A)-(2C) inserted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(3), 24(3)

F5 Words in Sch. 36 para. 12(2C)(d) substituted by 2010 c. 15, Sch. 26 Pt. 1 para. 59(a) (as inserted (E.W.S.) (1.10.2010) by The Equality Act 2010 (Consequential Amendments, Saving and Supplementary Provisions) Order 2010 (S.I. 2010/2279), art. 1(2), Sch. 1 para. 5 (see S.I. 2010/2317, art. 2))

F6 Words in Sch. 36 para. 12(2C)(d) substituted by 2010 c. 15, Sch. 26 Pt. 1 para. 59(b) (as inserted (E.W.S.) (1.10.2010) by The Equality Act 2010 (Consequential Amendments, Saving and Supplementary Provisions) Order 2010 (S.I. 2010/2279), art. 1(2), Sch. 1 para. 5 (see S.I. 2010/2317, art. 2))

F7 Sch. 36 para. 12(3A)-(3H) substituted for Sch. 36 para. 12(3) (for the tax year 2024-25 and subsequent tax years) by Finance Act 2024 (c. 3), Sch. 9 paras. 71(2), 124 (with Sch. 9 paras. 125-132A) (as amended by S.I. 2024/356, regs. 1, 4)

F8 Word in Sch. 36 para. 12(5) substituted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 53(5), 64(1)

F9 Word in Sch. 36 para. 12(6) substituted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 53(5), 64(1)

F10 Sch. 36 para. 12(7)(a) omitted (retrospectively) by virtue of Finance Act 2007 (c. 11), Sch. 20 paras. 17(4)(a), 24(3)

F11 Words in Sch. 36 para. 12(7)(b) omitted (retrospectively) by virtue of Finance Act 2007 (c. 11), Sch. 20 paras. 17(4)(b), 24(3)

F12 Words in Sch. 36 para. 12(7)(c) substituted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(4)(c), 24(3)

F13 Words in Sch. 36 para. 12(8)(a) omitted (retrospectively) by virtue of Finance Act 2007 (c. 11), Sch. 20 paras. 17(5), 24(3)

F14 Sch. 36 para. 12(8)(c)(d) inserted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(6), 24(3)

F15 Sch. 36 para. 12(8A)(8B) inserted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(7), 24(3)

F16 Words in Sch. 36 para. 12(8A)(b) substituted (with effect in accordance with s. 1184(1) of the amending Act) by Corporation Tax Act 2010 (c. 4), s. 1184(1), Sch. 1 para. 432(2) (with Sch. 2)

F17 Words in Sch. 36 para. 12(9)(a) substituted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 53(6)(a), 64(1)

F18 Words in Sch. 36 para. 12(9)(a) omitted (retrospectively) by virtue of Finance Act 2007 (c. 11), Sch. 20 paras. 17(8)(a), 24(3)

F19 Words in Sch. 36 para. 12(9)(b) inserted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(8)(b), 24(3)

F20 Words in Sch. 36 para. 12(9)(b) substituted (6.4.2006) by Finance Act 2005 (c. 7), Sch. 10 paras. 53(6)(b), 64(1)

F21 Words in Sch. 36 para. 12(9)(b) inserted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(8)(b), 24(3)

F22 Sch. 36 para. 12(9)(c) and preceding word inserted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(8)(c), 24(3)

F23 Sch. 36 para. 12(10) inserted (retrospectively) by Finance Act 2007 (c. 11), Sch. 20 paras. 17(9), 24(3)

Modifications etc. (not altering text)

C1 Sch. 36 para. 12 construed as one with reg. 30 (6.4.2006) by The Pension Protection Fund (Tax) Regulations 2006 (S.I. 2006/575), regs. 1, 30(3)

C2 Sch. 36 para. 12 modified (6.4.2006) by The Pension Protection Fund (Tax) Regulations 2006 (S.I. 2006/575), regs. 1, 30(2)

C3 Sch. 36 para. 12(2A)-(2C) applied (19.7.2011) by Finance Act 2011 (c. 11), Sch. 18 para. 14(10)

C4 Sch. 36 para. 12(2A)-(2C) applied (with application in accordance with Sch. 22 para. 1 of the amending Act) by Finance Act 2013 (c. 29), Sch. 22 para. 1(9)

C5 Sch. 36 para. 12(2A)-(2C) applied (15.9.2016) by Finance Act 2016 (c. 24), Sch. 4 para. 7

C6 Sch. 36 para. 12(7)-(8B) applied (19.7.2011) by Finance Act 2011 (c. 11), Sch. 18 para. 14(9)

C7 Sch. 36 para. 12(7)-(8B) applied (with application in accordance with Sch. 22 para. 1 of the amending Act) by Finance Act 2013 (c. 29), Sch. 22 para. 1(8)

C8 Sch. 36 para. 12(7)-(8B) applied (15.9.2016) by Finance Act 2016 (c. 24), Sch. 4 para. 6

C9 Sch. 36 para. 12(8) modified (6.4.2006) by The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (S.I. 2006/572), arts. 1(1), 35