PTM063210 - Member benefits: lump sums: Pension commencement lump sum (PCLS): payments
As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives. If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.
GlossaryPTM000001
Payment of a pension commencement lump sum
PCLS condition: entitlement to pension
PCLS condition: lump sum and death benefit allowance available
PCLS condition: timing of payment
PCLS condition: minimum age
PCLS condition: permitted maximum
Overpaid pension commencement lump sums
Taxation issues surrounding payment of a pension commencement lump sum
Reporting payment of a pension commencement lump sum to HMRC
Payment of a pension commencement lump sum
Paragraph 1 schedule 29 Finance Act 2004
When a member has become, or is to become entitled, to certain pension benefits under a registered pension scheme the scheme may also pay that member a tax-free lump sum. The legislation calls this type of payment a pension commencement lump sum.
To be a pension commencement lump sum, a lump sum must meet all the payment conditions set out below. One of these conditions limits the amount of the lump sum. This limit is known as the permitted maximum. Anything paid above the permitted maximum is not a pension commencement lump sum. See PTM063230 and PTM177000 for further details.
In certain circumstances a payment representing an intended pension commencement lump sum can be paid as an authorised member payment after the member has died. This can apply where a payment was due under scheme rules but entitlement under the tax rules was not established before the member died. See PTM063270 for further details.
PCLS condition: entitlement to pension
Section 166(2)(a) and paragraph 1(1)(aa) schedule 29 Finance Act 2004
The lump sum must be connected to an arising entitlement to a ‘relevant pension’ benefit under the same registered pension scheme. PTM063220 provides guidance on what is a relevant pension.
Entitlement
to a pension commencement lump sum arises immediately before the entitlement to
the relevant pension to which the lump sum is related.
However, if the lump sum is paid in anticipation of becoming entitled to a relevant pension within six months but the member dies before they became entitled to that pension, entitlement to the lump sum arises immediately before the member’s death. The lump sum payment may still be a pension commencement lump sum as long as the other payment conditions are satisfied.
PCLS condition: lump sum and death benefit allowance available
Paragraph 1(1)(b) and (3A) schedule 29 Finance Act 2004
The member must not have used up all their lump sum allowance nor their lump sum and death benefit allowance at the time of payment.
PCLS condition: timing of payment
Section 166(2)(a) and paragraph 1(1)(c) schedule 29 Finance Act 2004
The lump sum must be paid within an 18-month period starting 6 months before and ending 12 months after the member becomes entitled to it. Entitlement to the pension commencement lump sum arises on the day that actual entitlement (as opposed to prospective entitlement) to the linked relevant pension arises.
PCLS condition: minimum age
Paragraph 1(1)(d) schedule 29 Finance Act 2004
The member must have reached normal minimum pension age when the lump sum is paid. In some cases the normal minimum pension age may be replaced by a lower protected pension age (see PTM062210). A lump sum paid earlier may be a pension commencement where the entitlement to a relevant pension arises because the individual meets the ill-health condition (see PTM062100).
PCLS condition: permitted maximum
The amount which can be treated as a pension commencement lump sum is an amount which does not exceed the permitted maximum (see PTM063230).
Overpaid pension commencement lump sums
Regulations 17 and 18 The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171
Where the amount of a pension commencement lump sum is overpaid in ‘good faith’, the amount that has been overpaid will typically sit alongside the correct portion of the total lump sum provided. That correct portion is a normal pension commencement lump sum and entitlement to it arises in the normal way, as explained above.
However, the overpaid portion of the lump sum (the amount above the permitted maximum) is not strictly a pension commencement lump sum: rather it is a lump sum paid in error.
Taxation issues surrounding payment of a pension commencement lump sum
Sections 208 to 212, 239 to 241 and paragraph 1(2) schedule 29 Finance Act 2004
The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171
Section 637A, 637P and 637Q Income Tax (Earnings and Pensions) Act 2003
A pension commencement lump sum is normally paid tax-free.
A PCLS is a relevant lump sum and payment of a PCLS is a relevant benefit crystallisation event (see PTM173000). This means the payment of a PCLS reduces the member’s lump sum allowance and their lump sum and death benefit allowance.
Where a lump sum that exceeds the permitted maximum is paid to a member from a scheme, the excess is not a pension commencement lump sum and so does not benefit from tax-free treatment.
The excess lump sum might fall within the provisions of SI 2009/1171 or within the definition of another authorised member payment such as a pension commencement excess lump (see PTM177000) or certain error payments (see PTM146000). But if it does not, it is an unauthorised member payment.
The unauthorised member payment is subject to an unauthorised payments charge. The payment may also trigger an additional Income Tax surcharge on the member (an unauthorised payments surcharge). The payment may also give rise to a scheme sanction charge on the scheme administrator. More information on these tax charges can be found at PTM131000.
Reporting payment of a pension commencement lump sum to HMRC
Section 251(1)(a) and (4)(a) Finance Act 2004
Regulation 3, ‘reportable event 24’, The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567
There are two circumstances where the scheme administrator must report the payment of a pension commencement lump sum to HMRC:
- where the payment exceeds the member’s lump sum allowance
- where the payment exceeds the member’s lump sum and death benefit allowance
The circumstances are described in PTM161800.
Section 98 Taxes Management Act 1970
A scheme administrator failing to make the required report will become liable to penalties - see PTM160800.