Technical: When and how can clients best access pension lump sums
20 March 2019
John Keenan, head of Corporate Development, Xafinity SIPP & SSAS, examines the rules that apply to pension lump sums and how they can be accessed efficiently by clients.
The breadth of pensions’ subject matter, especially within SIPP and SSAS, is vast, meaning it can be easily forgotten that at the heart of any pension arrangement is retirement. For many members a tax-free payment or ‘lump sum’ is one of the key incentives in saving for retirement.
The most common type of retirement lump sum available when a member becomes entitled to their pension benefits is the 25% Tax Free Lump Sum. To become entitled the member must have reached age 55, although anyone with a protected pension age or who meets the ill health conditions may be able to receive the sum earlier and be entitled to a relevant pension. Pension options include: drawdown, lifetime or fixed term annuity, and scheme pension. In most cases, members are entitled to a tax-free portion of their pension benefits, referred to as the pension commencement lump sum (PCLS), usually representing 25% of the amount of benefits coming in to payment. Key points to note with a PCLS are:
Uncrystallised Lump Sums
On 6 April 2015, alongside pension freedoms, uncrystallised funds pension lump sum (UFPLS) was introduced. This lump sum benefit can be paid from any money purchase arrangement, where 25% of each payment is paid tax-free and the remaining 75% is taxed as pension income, in the same way as a PCLS payment being taken along with a pension option. Other than the value of the member’s pension pot, there is no limit to the amount of UFPLS that can be paid, but members must have lifetime allowance available. Key points to note with a UFPLS are:
Other points to note with pension ‘lump sum’ payments are:
As well as the more well-known PCLS and UFPLS, there are less common lump sums that may be payable to members under SIPP and SSAS arrangements.These are as follows.
Serious ill-health lump sum
This allowspension schememembers who are expected to live for less than 1 year to take the entirety of their pension benefits as a lump sum, subject to the following terms:
Small pension pot
This allows pension scheme members to take a lump sum if their occupational pension benefit is less than £10,000.SSAS arrangements may often find this difficult due to the member needing to be at arm’s length from any sponsoring employer of the scheme making the payment.
Small pension pots of up to £10,000 can also be taken from schemes that are non-occupational, including SIPP’s. This can be done up to a maximum of three small pension pots.
The lump sum can be taken from crystallised or uncrystallised funds, as long as all rights are extinguished on payment. But there is no requirement to have available LTA, as these payments are not tested against the limit.
Winding-up lump sum
This allows the payment of all scheme benefits to enable the winding up of a pension scheme. This will only apply to an occupational scheme, e.g. a SSAS, when strict criteria are met. If a scheme is winding up the following key points should be noted:
It is worth noting that if HMRC believe the wind up of a scheme is purely to facilitate this lump sum payment they could levy a £3,000 penalty.
This allows members with small Defined Benefits (DB) pension pots the freedom to take all their benefits as lump sum rather than via a series of small annuity payments.
From 16 September 2016 trivial commutation lump sums can only be paid in respect of DB arrangements, or scheme pensions under money purchase arrangements. These will in the most part not be payable under SIPP or SSAS.
Similar to Small Pension Pot, the benefit is not tested against LTA. However, the member does need to have some available LTA.
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