28 September 2010

HMRC have published, a draft Treasury Order relating to changes to the rules affecting the tax treatment of protected pension lump sums.  

At present, where an individual was entitled, on 5 April 2006, under a particular pension scheme to a lump sum exceeding 25 per cent of their uncrystallised rights (that is any rights that still have to come into payment) under paragraph 31 of Schedule 36 Finance Act 2004, one of the conditions that must be met for the lump sum to be paid tax free is that the individual must become entitled to all of their pensions (that were not in payment by 5 April 2006) under the scheme on the same day.


However this condition can cause scheme administrators practical difficulties. In particular a member of a final salary arrangement may have made additional contributions to a money purchase arrangement within the same scheme with a view to purchasing an annuity later to supplement their scheme pension. In these circumstances it is usually impossible to start both these pensions on the same day, which means the protection of the transitional rules for lump sums of more than 25 per cent is lost.


The draft Treasury Order addresses this issue, by allowing a period of up to three months between the entitlements to the scheme pensions and annuities to arise (article 23ZC) before the transitional protection is lost.


The draft Order also ensures that where the member dies before the entitlement to the last of the pensions arises, the transitional protection is preserved (article 23ZD and 23ZE).

HMRC have also become aware that where a protected lump sum is paid but the member dies before the connected pension is paid, the legislation currently does not protect the right to the full protected lump sum, even where there is only one connected pension. This anomaly is addressed in article 23ZA.


If you have any comments about this draft Order, please email these to Pensions Policy by 31 October 2010.