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
- 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 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.