Briefing Notes Small Lump Sum 680 392

Small lump sum payments

A look at Small Lump Sum Payments, the rules and the tax treatment.

Key Points

  • Small lump sum payments can be taken from either 1) occupational or public service schemes or 2) from non-occupational schemes, for example, personal pensions.
  • For occupational schemes and public service schemes there are no limits on the number of small lump payments that can be taken. For non-occupational schemes, individuals can take up to three separate arrangements (up to £10,000 per arrangement) as a small lump sum payment.
  • For occupational schemes and public service schemes - the rules apply at the scheme level but for non-occupational schemes, it is at the arrangement level.
  • Small lump sum payments are taxed in the same way as triviality payments.

What type of schemes can a small lump sum payment be made from?

Small lump sum payments can be paid from:

  • Occupational schemes
  • Public service schemes
  • Schemes that are not either occupational or public service schemes

What criteria apply to occupational and public service schemes?

These are some of the conditions for a small lump sum payment:

  • The member must be age 55 or over (or meet ill health or protected pension age requirements)
  • It must not exceed £10,000 (applied to actual payment)
  • It must extinguish the member’s entitlement to benefits under that scheme (and any related scheme if it doesn’t meet the conditions as a larger pension scheme)
  • The member cannot be a controlling director or connected to a controlling director
  • There can be no recognised transfer out from the scheme (or related scheme) within the previous three years
  • There is no limit on the number of small lump payments that can be made

What criteria apply to non-occupational schemes?

To meet the conditions for a small lump sum payment:

  • The member must be age 55 or over (or meet ill health or protected pension age requirements)
  • It must not exceed £10,000 (applied to actual payment)
  • It must extinguish the member’s entitlement to benefits under that arrangement
  • Must not exceed three payments in total

How does it work for non-occupational schemes?

The following criteria applies:

  • Individuals can take up to three separate payments (of up to £10,000), where any investment growth between the request and the payment counts towards the limit
  • It is at arrangement level and not scheme level
  • Arrangements can be merged, within the scheme, (subject to scheme rules) without affecting individuals with Enhanced or any of the Fixed Protections (2012, 2014 or 2016)
  • New arrangements can be set up, within the scheme, (this may impact on certain types of transitional protection like those listed in the previous point)
  • It is not treated as a benefit crystallisation event and therefore there is no lifetime allowance test

How is a Small Lump Sum Payment taxed?

How it is taxed depends on whether the payment is from crystallised or uncrystallised benefit rights

From uncrystallised benefit rights:

  • 25% tax-free
  • 75% taxed at marginal rates of income tax (treated as pension income)

From crystallised benefit rights:

  • Whole payment taxed at marginal rates of income tax

Example – Duncan (non-occupational scheme)

  • Is 55 years old
  • Has a personal pension plan worth £27,000
  • Has no other pension plans or any transitional protection in place
  • Wants to take his plan under the small lump sum payment rules
  • Duncan asks his provider to set up an additional two arrangements within his scheme
  • The provider agrees and internally transfers £9,000 into each of these
  • He now has three separate arrangements with £9,000 in each
  • He now meets all the criteria to take these under the small lump sum payment rules

Before

After

  • Duncan can now take all three payments under the small lump sum payment rules
  • Each £9,000 arrangement will provide 25% tax-free cash of £2,250.
  • Each net small lump sum payment would be (assuming basic rate taxpayer) £7,650.

Planning considerations

Pension planning can help clients:

  • Identify potential lump sums and the rules around them
  • In some cases, for non-occupational schemes, be able to merge arrangements or set up new arrangements and understand the implications where transitional protection is in place

Taking small lump sum payments can help clients:

  • Access monies from their pension without triggering the Money Purchase Annual Allowance (MPAA)
  • Access monies without having them tested against the lifetime allowance

This briefing note is also available as a PDF

This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at April 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.