Stand-alone lump sums

To be classed as a stand-alone lump sum, the lump sum entitlement must meet a number of conditions:

• an individual must have reached the normal minimum pension age of 55, increasing to 57 from 6 April 2028, or, if retiring earlier, have a protected pension age or be taking benefits due to ill-health.
• all of an individual’s uncrystallised rights under the scheme must be paid at the same time as a single relevant benefit crystallisation event.
• if an individual has registered tax-free cash of more than £375,000 alongside primary protection, then the stand-alone lump sum must represent a 100% tax-free cash entitlement as at 5 April 2006 under a registered pension scheme. (In this case a member will have a primary protection certificate which will quote the protected monetary amount of lump sum.)
  
• if an individual has registered tax-free cash of more than £375,000 alongside enhanced protection, all of their approved pension benefits if they had retired on 5 April 2006 could have been paid as tax-free cash.  (In the case where a member has registered tax-free cash of more than £375,00 with enhanced protection, the enhanced protection certificate will quote the maximum percentage of tax free cash available for each Relevant Benefit Crystallisation Event (RBCE))
• if the protection for tax-free cash is scheme specific only (in other words, the individual does not have registered tax-free cash of more than £375,000 alongside either primary or enhanced protection), then had the member retired on 5 April 2006, all of their benefits under approved occupational pension schemes (including section 32 buyout policies) relating to that employment could have been paid as tax-free cash. 

In each of the above conditions, there must have been no ‘relevant benefit accrual’ under the scheme paying the stand-alone lump sum on or after 6 April 2006. Generally, for a money purchase scheme this means no contributions have been paid, and for a defined benefit scheme that any increase in benefit value is within the ‘appropriate limit’. The following guidance from HMRC provides further information on what the appropriate limit is: 

Payment of a stand-alone lump sum is a relevant benefit crystallisation event. This means the stand-alone lump sum is tested against the lump sum and death benefit allowance. 

Generally the amount of a stand alone lump sum that can be paid tax free is the lesser of the value that could have been paid on 5 April 2023 or the member's available LSDBA immediately before the member becomes entitled to the SALS. 

Member has no protections/enhancements in place

Any amount paid above the 5 April 2023 value or the remaining LSDBA will be treated as pension income and is subject to income tax at the members marginal rate. This means that the SALS payment may not be fully tax-free. 

For example, if the 5 April 2023 value was £250,000 and the LSDBA available was £400,000, the maximum SALS payable tax free will be £250,000. If there has been growth since 5 April 2023 to £300,000, that portion (£50,000) will be subject to income tax at the members marginal rate. 

The LSA will be reduced by 25% of the whole lump sum (25% x £300,000) and the LSDBA will be reduced by the full tax free amount (£250,000).

Member has primary protection and registered tax-free cash

Lump sum rights at 5 April 2006 exceeding £375,000 

The maximum tax-free Stand-alone Lump Sum (SALS)  is limited to the lower of:

- the member’s available Lump Sum and Death Benefit Allowance (LSDBA) immediately before the member becomes entitled to the SALS; and

- the maximum tax-free SALS that the member could have been paid on 5 April 2023. 

The LSA and LSDBA will be reduced by the tax-free part of the SALS. Any excess paid is treated as pension income and is subject to a charge to income tax at the member’s marginal rate. (The payment is treated as being a relevant lump sum for the purpose of these allowances.) 

For example, if the tax-free SALS on 5 April 2023 value was £500,000 and the LSDBA available at the claim date was £400,000, the maximum SALS payable tax free will be £400,000.

If there has been growth since 5 April 2023 to £550,000, that portion (£50,000) plus the excess £100,000 will be subject to income tax at the members marginal rate. 

The LSA will be reduced by the whole tax-free SALS (£400,000) and the LSDBA will be reduced to nil.

Lump sum rights at 5 April 2006 are lower than £375,000

The maximum tax-free Stand-alone Lump Sum (SALS) is limited to the lower of :

 - the member’s available LSDBA immediately before the member becomes entitled to the SALS; and 

- the maximum tax-free SALS that the member could have been paid on 5 April 2023.

LSDBA will be reduced by the tax-free part of the SALS but the LSA will only reduce by 25% of the SALS. Any excess paid, is treated as pension income and is subject to a charge to income tax at the member’s marginal rate.

This only applies where the lump sum rights at 5 April 2006 are lower than £375,000. (The payment is treated as being a relevant lump sum for the purpose of these Allowances.) 

Member has enhanced protection and registered tax-free cash, or scheme-specific tax-free cash protection

Lump sum rights at 5 April 2006 exceeding £375,000 

The maximum tax-free Stand-alone Lump Sum (SALS) is limited to the maximum tax-free SALS that the member could have been paid on 5 April 2023 under the arrangement, minus the aggregate of any Pension Commencement Lump Sum (PCLS) and any SALS paid to the member under the arrangement on or after 6 April 2023.

The LSA and LSDBA will be reduced by the tax-free part of the SALS. Any excess paid is treated as pension income and is subject to a charge to income tax at the member’s marginal rate. (The payment is treated as being a relevant lump sum for the purpose of these Allowances.) 

For example, where the LSA available was £225,000 and the LSDBA was £400,000, if the tax-free SALS on 5 April 2023 value was £200,000 and they’ve not received any payments since 6 April 2023, the SALS payable is £200,000.

If there has been growth since 5 April 2023 to £205,000, that portion (£5,000) will be subject to income tax at the members marginal rate. 

The LSA will be reduced to £25,000 and the LSDBA will reduce to £200,000.

Lump sum rights at 5 April 2006 are lower than £375,000 

The maximum tax-free Stand-alone Lump Sum (SALS) is limited to the lower of the member’s available LSDBA immediately before the member becomes entitled to the SALS; and the maximum tax-free SALS that the member could have been paid on 5 April 2023.

LSDBA will be reduced by the tax-free part of the SALS but the LSA will only reduce by 25% of the SALS. Any excess paid, is treated as pension income and is subject to a charge to income tax at the member’s marginal rate.

This only applies where the lump sum rights at 5 April 2006 are lower than £375,000. (The payment is treated as being a relevant lump sum for the purpose of these Allowances.) 

Primary protection with registered tax-free cash

The policy intent is for individuals with enhanced protection or primary protection and protected lump sum rights to be able to take a PCLS over their lump sum allowance of £375,000.

HMRC is aware of the existing legislative issue that prevents this so we await further legislation to rectify the matter.

Until amending regulation is introduced members may wish to delay but should seek advice in the meantime.

Enhanced protection with registered tax-free cash

From April 2024, a member is unable to carry over the benefit of their protection without losing it. HMRC are aware of the existing legislative issue that prevents this  so we await further legislation to rectify the matter..

Until amending regulation is introduced members may wish to delay but should seek advice in the meantime.

Scheme-specific tax-free cash protection

From April 2024, a member is unable to carry over the benefit of their protection without losing it.

Affected members should still be able to transfer their rights to a new provider before the amending legislation is effective. However, given the technical error with the formula for calculating the additional lump sum amount, they may wish to defer the payment of a PCLS under scheme-specific lump sum protection.

The right to a stand-alone lump sum can be protected on transfer in these situations:

• on a block transfer to a registered pension scheme where there is already a right to a SALS and the receivng scheme does not have other accrued rights.
• on occupational scheme wind-up, where benefits are being transferred to a buyout contrat or assigned to the individual.

It is also possible for a transfer to be made into a scheme where there is already a stand-alone lump sum entitlement. The right to a stand-alone lump sum under the receiving scheme would be lost if there is a transfer in unless:

• the benefits transferred in consist only of stand-alone lumps sums, and
• no previous tax-free cash or stand-alone lump sum has been paid to the member from the receiving scheme, and 
• all of the member’s uncrystallised rights are transferred from the transferring scheme o the receiving scheme.

Where a member has primary protection with registered tax-free cash and takes a stand-alone lump sum from a money purchase arrangement then they will be deemed to have first flexibly accessed their pension rights (if not already) immediately before the payment of the stand-alone lump sum. This means that any contributions made after the payment of the stand-alone lump sum will count towards the MPAA. See the Money Purchase Annual Allowance section of our Annual Allowance guide for further information. 

Where a member has enhanced protection with registered tax-free cash or scheme-specific tax-free cash and takes a stand-alone lump sum, then the MPAA will not apply to them, unless it applies already.