PTM176320 - Lump sum allowance and lump sum and death benefit allowance: Enhanced protection: Lump sum protection in excess of £375,000
Lump sum protection available for individuals with enhanced protection
Protection of lump sum exceeding £375,000 with enhanced protection: pension commencement lump sums
Lump sum rights that exceed £375,000 and enhanced protection: stand-alone lump sums
Protection of lump sums exceeding £375,000 with enhanced protection: calculating the applicable amount
Lump sum rights that exceed £375,000 and enhanced protection: notification and certificate
Lump sum protection available for individuals with enhanced protection
Individuals with enhanced protection and no separate lump sum protection have their lump sum allowance fixed at £375,000. However, the guidance on this page applies where the total value of an individual’s crystallised and uncrystallised lump sum rights on 5 April 2006 was more than £375,000.
If, on 5 April 2006, an individual had total lump sum rights of £375,000 or less, and had (in any one pension scheme) uncrystallised lump sum rights exceeding more than 25% of their total uncrystallised rights in that scheme then see PTM063130 for more information around scheme-specific lump sum protection.
In an exceptional case, if you should need to consult fuller guidance on valuing lump sum rights in this context, please see page RPSM03105000 in the Registered Pension Schemes Manual, on The National Archives website.
To be paid a pension commencement lump sum an individual must have available lump sum allowance, however future legislation may adjust this requirement please see pension scheme newsletters for individuals without an available lump sum allowance.
Protection of lump sum exceeding £375,000 with enhanced protection: pension commencement lump sums
Paragraph 27 and 29 Schedule 36 Finance Act 2004
Individuals are able to take a pension commencement lump sum (PCLS) when they take some or all of their pension benefits. Pension commencement lump sums are not subject to income tax.
A valid claim for enhanced protection coupled with lump sum rights exceeding £375,000 modifies an individual’s pension commencement lump sum permitted maximum.
The PCLS must not exceed the permitted maximum. If the PCLS exceeds the permitted maximum then the entirety of the lump sum payment will be considered an unauthorised payment, unless the individual has rights to a pension commencement excess lump sum (PCELS).
Permitted maximum of the pension commencement lump sum
The amount of the pension commencement lump sum is limited to an amount equal to:
- The maximum amount of a pension commencement lump sum that could have been paid to the individual on 5 April 2023 under the arrangement, less
- The aggregate of the amounts of any pension commencement lump sums to which the member previously became entitled under that arrangement after 5 April 2023.
To calculate the maximum amount of a PCLS that could have been paid at 5 April 2023 the applicable amount must be determined.
This is the maximum amount of a pension commencement lump sum that could be paid to the individual on 5 April 2023.
Lump sum rights that exceed £375,000 and enhanced protection: stand-alone lump sums
Articles 25A to 25D The Taxation of Pension Schemes (Transitional Provisions) Order 2006
Where on 5 April 2006 an individual’s total uncrystallised rights in all relevant pension arrangements could have been taken entirely as a lump sum benefit the individual can still receive all their benefits in a lump sum form if certain conditions are met. Where such a lump sum is paid the lump sum is called a stand-alone lump sum (SALS).
The stand-alone lump sum must not exceed the stand-alone lump sum permitted maximum. If the SALS exceeds the permitted maximum, then the excess will be subject to income tax at the recipient’s marginal.
Permitted maximum of the stand-alone lump sum
The amount of the stand-alone lump sum is limited to an amount equal to:
- The amount of a stand-alone lump sum that could have been paid to the individual with no liability to income tax on 5 April 2023 under the arrangement pursuant to which the entitlement to the stand-alone lump sum arises in respect of the individual, less
- The aggregate of the amounts of any stand-alone lump sums and pension commencement lump sum previously paid to the individual under that arrangement after that date.
To calculate the maximum amount of a SALS that could have been paid at 5 April 2023 the applicable amount must be determined.
This is the maximum amount of a SALS that could be paid to the individual on 5 April 2023.
Protection of lump sums exceeding £375,000 with enhanced protection: calculating the applicable amount
Applicable amount - relevant pension income withdrawal
Paragraph 29(2) Schedule 36 Finance Act 2004
Where the relevant pension is income withdrawal the following formula is used to determine the applicable amount:
A / B x (C+D)
Where:
- A is the value of the individual’s relevant uncrystallised lump sum rights on 5 April 2006,
- B is the value of the individual’s relevant uncrystallised pension rights on 5 April 2006,
- C is the pension commencement lump sum paid,
- D is
- The aggregate of the sums, and the market value of the assets, designated as available for the payment of drawdown pension on that occasion, less
- So much (if any) of that amount as represents rights which are attributable to a disqualifying pension credit
Example
Helen has enhanced protection and had uncrystallised lump sum rights of £400,000 and uncrystallised pension rights of £2,000,000 on the 5 April 2006.
A is therefore £400,000, and B is £2,000,000.
£400,000 / £2,000,000 = 0.2
On 25 March 2024, Helen takes benefits from one of her pension schemes, which is valued at £1,000,000 prior to benefits being paid, by taking draw down pension and takes £200,000 as a pension commencement lump sum. She has no disqualifying pension credit.
C is therefore £200,000 and D is £1,000,000
£200,000 + £1,000,000 = £1,200,000
0.2 x £1,200,000 = £240,000
Helen’s applicable amount is £240,000.
Helen’s permitted maximum can now be determined. Helen has lump sum allowance available.
Helen has no PCLS between 5 April 2023 and the £200,000 payment on the 25 March 2024.
Therefore, the aggregate amount of PCLS she previously became entitled to is nil.
£240,000 - £0 = £240,000
Helen’s PCLS does not exceed the permitted maximum, therefore it is an authorised payment, and she is not liable for an income tax charge.
Applicable amount - lifetime annuity
Paragraph 29(3) Schedule 36 Finance Act 2004
Where the relevant pension is a lifetime annuity the following formula is used to determine the applicable amount:
A / B x (C+ D – E)
Where:
- A is the value of an individual’s relevant uncrystallised lump sum rights on 6 April 2006,
- B is the value of the individual’s uncrystallised pension rights on 5 April 2006
- C is the pension commencement lump sum paid
- D is the annuity purchase price
- E is:
- If the annuity is purchased by sums or assets that are part of the member’s drawdown pension fund or flexi-access drawdown fund, the aggregate of the amount of those sums and market value of those assets, and
- Otherwise, so much (if any) of the aggregate of the lump sum and the annuity purchase prices as represents the rights which are attributable to a disqualifying pension credit
Example
Gregg has enhanced protection and had uncrystallised lump sum rights of £600,000 and uncrystallised pension rights of £2,000,000 on 5 April 2006.
A is therefore £600,000 and B is £2,000,000.
£600,000 / £2,000,000 = 0.3
On 5 April 2026, Gregg took benefits from his pension scheme worth £750,000 in the form of a lifetime annuity bought for £600,000 and a SALS of £150,000.
C is £0 as he has not taken a PCLS, and D is £600,000.
The annuity is not purchased by sums or assets from a drawdown fund. Gregg does not have a disqualifying pension credit, E is therefore £0.
£0 + £600,000 - £0 = £600,000
0.3 x £600,000 = £360,000
Gregg’s applicable amount it £360,000.
Gregg’s permitted maximum can now be determined.
Gregg has no other PCLS or SALS from this arrangement between 5 April 2023 until the £150,000 payment on the 5 April 2026.
Therefore, the aggregate amount of PCLS and SALS he previously became entitled to is nil.
£360,000 - £0 = £360,000
Gregg’s SALS does not exceed the permitted maximum and he is not liable for an income tax charge.
Appliable amount - defined benefits or collective money purchase arrangements
Paragraph 29(4) Schedule 36 Finance Act 2004
Where the relevant pension is a defined benefits or collective money purchase arrangement the following formula is used to determine the applicable amount:
A / B x (C + D)
Where:
- A is the value of the individual’s relevant uncrystallised lump sum rights on 5 April 2006
- B is the value of the individual’s uncrystallised pension rights on 5 April 2006
- C is the pension commencement lump sum paid
- D is an amount equal to the value of the pension rights crystallised by reason of the individual becoming entitled to the pension
Example
Bonnie has enhanced protection and had uncrystallised lump sum rights of £800,000 and uncrystallised pension rights of £2,000,000 on 5 April 2006.
A is £800,000 and B is £2,000,000.
£800,000 / £2,000,000 = 0.4
On 18 June 2024, Bonnie takes benefits from her pension scheme (which is a defined benefits arrangement) as a scheme pension of £40,000 and a pension commencement lump sum benefit of £100,000.
C is £100,000
D is 20 x £40,000 = £800,000
£100,000 + £800,000 = £900,000
0.8 x £900,000 = £640,000
Bonnie’s applicable amount is £640,000.
Bonnie’s permitted maximum can now be determined.
Bonnie has no other PCLS from this arrangement between 5 April 2023 until the £100,000 payment on the 18 June 2024.
Therefore, the aggregate amount of PCLS he previously became entitled to is nil. Bonnie has available lump sum allowance.
£640,000 - £0 = £640,000
Bonnie’s PCLS does not exceed the permitted maximum, therefore it is an authorised payment, and she is not liable for an income tax charge.
Applicable amount - money purchase arrangement
Paragraph 29(5) Schedule 36 Finance Act 2004
Where the relevant pension is a money purchase arrangement the following formula is used to determine the applicable amount:
A / B x (C+D)
Where:
- A is the value of the individual’s relevant uncrystallised lump sum rights on 5 April 2006
- B is the value of the individual’s uncrystallised pension rights on 5 April 2006
- C is the pension commencement lump sum
- D is the scheme purchase price
Example
Victor has enhanced protection and had uncrystallised lump sum rights of £750,000 and uncrystallised pension rights of £1,750,000 on 5 April 2006.
A is £750,000 and B is £1,750,000.
£750,000 / £1,750,000 = 0.4
On 20 August 2025, Victor becomes entitled to a scheme pension purchased at £100,000 and a pension commencement lump sum benefit of £40,000.
C is £40,000 and D is £100,000
£40,000 + £100,000 = £140,000
0.4 x £140,000 = £56,000
Victor’s applicable amount is £56,000.
Victor’s permitted maximum can now be determined.
Victor has no other PCLS from this arrangement between 20 August 2025 until the £40,000 payment on the 20 August 2025.
Therefore, the aggregate amount of PCLS he previously became entitled to is nil. Victor has available lump sum allowance.
£56,000 - £0 = £56,000
Victor’s PCLS does not exceed the permitted maximum, therefore it is an authorised payment, and he is not liable for an income tax charge.
Lump sum rights that exceed £375,000 and enhanced protection: notification and certificate
Regulations 3 and 10 The Registered Pension Schemes (Enhanced Allowances) Regulations 2006 – SI 2006/131
Individuals that notified HMRC of their intent to rely on enhanced protection for their pension rights can protect ftheir total lump sum rights valued at 5 April 2006 at more than £375,000 from the income tax charge.
HMRC issues a certificate to the individual confirming enhanced protection and showing the amount of the protected lump sum expressed as a monetary amount.
Where this form of lump sum protection applies, it takes precedence over both the lump sum protection for those with dormant primary protection and scheme specific lump sum protection.