Payment of lump sum benefits from a registered pension scheme

By Tolley

The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Payment of lump sum benefits from a registered pension scheme
  • Introduction
  • Authorised and unauthorised benefits from registered pension schemes
  • The PCLS
  • Recycling cash lump sums
  • Trivial commutation lump sum
  • Other lump sums ― small pots
  • Short service refund lump sum
  • Refund of excess contributions lump sum
  • Winding-up lump sum
  • Serious ill health lump sum


The purpose of a registered pension scheme is to provide retirement and death benefits for its members, and the financial dependants of members. The UK pensions taxation system is predicated upon tax privileges through relief on contributions when made, a tax-privileged pension fund which grows largely free of taxation and benefits on retirement which are subject to taxation with the exception of the pension commencement lump sum (PCLS) which is (currently) free from UK income tax.

Authorised and unauthorised benefits from registered pension schemes

A registered pension scheme is authorised to pay out benefits to or in respect of a member in two forms: as a pension or as a lump sum (or of course both).The legislation lists all the authorised forms of pensions and lump sum payments, the circumstances in which they can be paid, and sets out the conditions and restrictions that these payments must meet or follow in order for them to be authorised.

FA 2004, ss 164–168, Schs 28, 29

The legislation authorises a registered pension scheme to provide lump sum payments that comply with the lump sum rules in FA 2004, s 166. Authorised member payments are frequently chargeable to tax on the recipient.

If a pension benefit or a lump sum payment does not comply with the above rules, it is an ‘unauthorised member payment’ and any such payments made are taxable. Unauthorised member payments (that is to say payments made outside of these rules) give rise to a tax charge of up to 55% of the unauthorised payment and in addition, a scheme sanction charge may be payable by the administrator of the pension scheme that has granted the unauthorised member payment. This charge is 15% of the payment made or deemed to have been made.


As set out above, two

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