伊人直播

Pension commencement lump sums: amount that can be disregarded

Paragraph 10(4)(b), (5)(b) and (6)(a)(ii) and (b) of Part 6 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (as inserted by regulation 8(6) of the Social Security (Contributions) (Amendment No. 2) Regulations 2006)

Paragraphs 1(2) and 2 of Schedule 29 to Finance Act 2004, as modified by paragraph10(6)(a)(ii) and (b) above

As mentioned in the final bullet in NIM02769, there is a limit on the amount of a pension commencement lump sum (鈥淧CLS鈥�) that can be disregarded in the calculation of earnings. That limit is referred to in paragraph 10(6) as 鈥渢he permitted lump sum鈥� (鈥淧LS鈥�).

The calculation of the PLS is based broadly on that used for calculating the maximum amount of a PCLS that may be paid tax-free - in broad terms, roughly 25% of the value of an individual鈥檚 pension rights (paragraph 2 of Schedule 29; RPSM09104220).

Where the amount of the PCLS exceeds the amount of the PLS, no amount of it can be disregarded in the calculation of earnings.

The PLS is the higher of:

MVF=4 and LS + (MAP x 20) = 4

where:

MVF is the market value of the employee鈥檚 employer-financed retirement benefits scheme (鈥淓FRBS鈥�) fund at the time the benefit is paid to the employee

LS is the amount of the lump sum

MAP is the maximum annual pension which could be paid to the employee under the arrangement.

Example

The MVF of employee A鈥檚 EFRBS fund is 拢100,000. The amount of the PCLS is 拢25,000. The MAP is 拢10,000 a year.

The PLS (ie, the amount that can be disregarded in the calculation of earnings) is the higher of:

拢100,000 梅 4 = 拢25,000 and

拢25,000 + (拢10,000 x 20) = 拢225,000 梅 4 = 拢56,250

As the amount of PCLS - 拢25,000 鈥� is less than the PLS - 拢56,250 鈥� the whole amount of the PCLS can be disregarded in the calculation of earnings.