GLOSSARY

Small lump sum definition

Published by a LexisNexis Pensions expert

What does Small lump sum mean?

The expression ‘small lump sum’, when used as a defined term in this glossary, refers to a specific type of authorised payment made after 30 November 2009 under Part 2 of the Registered Pension Schemes (Authorised Payments) Regulations 2009 (SI 2009/209).

Typically, ‘small lump sums’ will be payments of less than £2,000 derived either from member's uncrystallised benefit rights, or from member's/ dependant's crystallised pension rights. ‘Small lump sum’ payments were developed to help solve a problem popularly known as having a ‘stranded pot’, where the sum in question is too small to arrange a pension with. In order to qualify as a ‘small lump sum’ the payment must meet certain conditions laid down in the regulations.

Minimise

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Trivial commutation

HM Revenue & Customs (HMRC) recognises that schemes could incur disproportionate costs in providing small pensions under registered pension schemes, so the legislation allows small or trivial pension benefits to be commuted and paid as a cash lump sum. From the recipient’s point of view, a single lump sum may be seen as more convenient and useful than a series of very small pensions payments.'Trivial' commutation therefore involves the commutation of the whole of a member’s pension under a particular arrangement, or the total of a member’s pension under a series of arrangements, where the pension, or total pension, is of a very small amount.Changes were made to the trivial/small lump sum commutation regime to reflect the pension freedoms introduced on 6 April 2015:•the first set of changes involved increasing the trivial/small lump sum commutation limits. These changes were announced by the Budget 2014 to take effect retrospectively from 27 March 2014. The statutory formalities bringing this legislation into force were completed on 17 July 2014, when the Finance Act 2014 (FA 2014) received its Royal Assent. The retrospectivity of the changes

Pension commencement lump sums (PCLSs)

When a member of a pension scheme becomes entitled to receive their scheme benefits, they can usually take part as a tax-free lump sum. HMRC calls this a ‘pension commencement lump sum’ (PCLS). Taking a lump sum is usually at the option of the member who will need to elect the amount they take, but the scheme rules should be checked for procedural or other requirements. Under current legislation a PCLS is tax free, and so is usually an attractive option for members.Given the tax free status, HMRC’s conditions for a lump sum to qualify as a PCLS are strict.This Practice Note first considers HMRC’s general conditions and then special conditions applying in particular cases.In a defined contribution (DC) scheme, a proportion of the member’s pension pot is simply paid to the member as cash.The situation is more complex for a defined benefit (DB) scheme, where a value must also be placed on the amount of pension that is given up for the lump sum. It is very unusual for scheme rules to specify this value and instead the rules will specify who has the power to set the value.Conditions for payment of PCLSA lump sum is a PCLS (and therefore tax free under current legislation) if the following conditions are satisfied:•age condition—the member has reached normal minimum pension

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In the context of reg 11 of the Registered Pension Scheme (Authorised Payments) Regulations 2009, SI 2009/1171, does the term ‘related scheme’ include a former scheme operated by the same employer which has had a bulk transfer to the scheme wanting to make a small lump sum payment or can the term be interpreted to mean only schemes that are running concurrently?

In the context of reg 11 of the Registered Pension Scheme (Authorised Payments) Regulations 2009, SI 2009/1171, does the term ‘related scheme’ include a former scheme operated by the same employer which has had a bulk transfer to the scheme wanting to make a small lump sum payment or can the term be interpreted to mean only schemes that are running concurrently? In answering this Q&A, we have assumed you are referring to regulation 11 of the Registered Pension Scheme (Authorised Payments) Regulations 2009, SI 2009/1171 (SI 2009/1171, reg 11), which—unlike its de minimis counterpart in SI 2009/1171, reg 12 (which applies to large occupational pension schemes)—does not expressly caveat bulk transfers from a ‘related scheme’ to the receiving scheme from the conditions that need to be satisfied for a small lump sum payment. The absence of such a caveat could prevent the payment of a small pot lump sum from the receiving scheme under SI 2009/1171, reg 11, since SI 2009/1171, reg 11(1)(f) prohibits recognised transfers from that scheme or any related scheme in the three years preceding the payment of a small lump sum. The definition of ‘related scheme’ is therefore significant. Rationale behind regs 11-12 To provide some context in respect of SI 2009/1171, regs 11–12: • SI 2009/1171, reg 11 was only ever designed to tackle the problem of small ‘stranded pots’ in occupational pension schemes where

In a scheme with salary sacrifice, what options are available to employers wanting to pay contribution refunds to early leavers with no short service benefit?

In a scheme with salary sacrifice, what options are available to employers wanting to pay contribution refunds to early leavers with no short service benefit? This Q&A assumes the scheme in question is an occupational pension scheme. No short service refund lump sum option Since A-day (6 April 2006), trustees of registered occupational pension schemes have been legally obliged to give early leavers with no right to a short service benefit but with at least three months' pensionable service, the right to choose between: • a refund of member contributions known as a 'short service refund lump sum'. This is a type of authorised member payment, and • a cash transfer sum. This is the cash equivalent of an early leaver's accrued benefits (taking account of both member and employer considerations), which can either be used to buy an annuity or paid into a registered pension scheme A short service refund lump sum is limited to the amount of contributions actually paid by a member. Even in the context of legislation applying to early leavers, the term 'member contributions' (which is referred to in legislation as 'employee contributions') is defined under the Pension Schemes Act 1993, s 101AB(5), as 'contributions made to the scheme by or on behalf of the member on his own account'. The lump sum cannot therefore include any employer contributions paid in respect of the member without incurring

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Lexis®PSL Pensions weekly highlights—27 April 2017

Welcome to the Pensions weekly highlights from the Lexis®PSL Pensions team for the week ending 27 April 2017. This week’s edition of the Pensions highlights includes a review of key news stories, as well as dates for your diary.

FCA policy statement PS16/12—final rules and guidance on pension reforms

Pensions analysis: On 25 April 2016, the Financial Conduct Authority (FCA) published policy statement ‘PS16/12: Pension Reforms—feedback on CP15/30 and final rules and guidance’, which summarises the responses it received to consultation paper CP15/30 and publishes final rules and guidance on the areas where it proposed changes to its handbook. The rules and guidance will affect consumers who have or will have contract-based defined contribution pension funds, or who will look to access their pension savings from a defined contribution fund (including by transferring into a contract-based pension). The Lexis®PSL Pensions team takes a look at the policy statement and the final rules and guidance.

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