Stand-out Q – lump sum protection…

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FRI, 07 APR 2017

Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.

Question:

An individual with enhanced protection (EP) believes they have lump sum protection, however they are unsure as to what form this takes; what forms of protection were available for someone with EP?

Answer:

If the individual had lump sum rights worth in excess of £375,000 at the 5 April 2006, they were able to apply for the associated lump sum protection. If this is the case then the EP certificate will have a stated percentage on it. By way of example if the individual’s pension fund is worth £10m and the protected PCLS is 15%, then their pension commencement lump sum (PCLS) permitted maximum is £1.5m. If there is no percentage stated on the EP certificate, then the individual does not have this form of lump sum protection. This could either have been as a result of an omission by them when they applied for EP, or their total lump sum rights were less than £375,000 on 5 April 2006 and they were therefore not able to apply for it.

The other form of protection they could have is scheme specific lump sum protection. To determine whether or not this was the case the following calculation was carried out.

VULSR/VUR x 100

The value of an individual’s uncrystallised lump sum rights in the scheme on 5 April 2006 was identified; VULSR. Also, the value of an individual’s uncrystallised pension rights in the scheme on 5 April 2006 was identified; VUR. If the answer to the above calculation was greater than 25 then scheme specific lump sum protection applied. If the rules allow, the scheme will be able to pay a lump sum of the value of the lump sum rights on 5 April 2006 increased by 20% for such time as the standard lifetime allowance is not more than £1.8 million plus an additional lump sum amount (ALSA). For the scheme to pay out the higher PCLS all the benefits have to be taken from the scheme at the one time. See our Factsheet on scheme specific lump sum protection for an explanation of how the ALSA works in practice.

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