PTM177000 - Lump sum and lump sum and death benefit allowance: Pension commencement excess lump sums
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.
Payment of a pension commencement excess lump sum
PCELS Condition: Entitlement
PCELS Condition: Lump sum allowance and lump sum death benefit allowance
PCELS Condition: Timing of payment
PCELS Condition: Minimum age
PCELS Condition: Excluding lump sums
Taxation of a pension commencement excess lump sum
Payment of a pension commencement excess lump sum
Paragraph 3C Schedule 29 Finance Act 2004
Where a member’s lump sum allowance has been fully used up, any benefit entitlement over and above the member’s available lump sum allowance may, if the scheme permits, be commuted and paid as a lump sum.
The legislation calls this type of payment a pension commencement excess lump sum. These lump sums are subject to any limits within the scheme rules and pension schemes are not obligated to offer these lump sums to their members.
From 6 April 2024, any references to a “lifetime allowance excess lump sum” in a pension scheme’s rules can be treated as referring to a pension commencement excess lump sum instead.
To be a pension commencement excess lump sum, a lump sum must meet all the payment conditions below.
PCELS Condition: Entitlement
Section 166(2)(a) Finance Act 2004
Paragrap 3C(1)(a) and (d) Schedule 29 Finance Act 2004
The lump sum must be connected to an arising entitlement to a relevant pension.
Entitlement to a pension commencement excess lump sum arises immediately before the entitlement to the relevant pension to which the lump sum is related. If a member dies before they became entitled to the pension from which the lump sum was paid, then entitlement to the lump sum arises immediately before the member’s death.
The payment of the lump sum must not reduce the rate of payment of any pension which the member has already become actually entitled or extinguish the member’s entitlement to payment of any such pension (this means any pension in payment already under the scheme.) This requirement does not prevent an uncrystallised pension entitlement coming into payment at the same time from being reduced.
PCELS Condition: Lump sum allowance and lump sum death benefit allowance
Paragraph 3C(1)(b) Schedule 29 Finance Act 2004
A pension commencement excess lump sum can only be paid when none of the member’s lump sum allowance or lump sum and death benefit allowance is available.
Example 1
Peter is a member of a defined benefits arrangement. He has no protections. He decides to take his benefits, and he has already used £214,629 of his lump sum allowance – leaving him with £53,655 available.
Peter is entitled to a scheme pension of £12,000 per annum and the scheme rules allow for a lump sum payment of £80,000.
On 8 August 2025, Peter wishes to take a lump sum of £80,000 as per his scheme rules. Peter initially receives a pension commencement lump sum of £53,655. This is a relevant benefit crystallisation event. This is deducted from his lump sum allowance.
£53,655 - £53,655 = £0
As of 8 August 2025, Peter no longer has any lump sum allowance. Peter cannot receive a pension commencement lump sum in excess of this amount, it would be considered an unauthorised payment.
Now that Peter no longer has any lump sum allowance left he meets all the conditions and any additional lump sum payment will be a pension commencement excess lump sum.
To work out the value of the pension commencement excess lump sum, the tax-free lump sum needs to be deducted from the total lump sum payment.
£80,000 - £53,655 = £26,345
Peter
is entitled to a pension commencement excess lump sum of £26,345, which will be
subject to income tax at his marginal rate.
Example 2
Prior to 6 April 2024, Natasha used up all of her lifetime allowance, therefore at 6 April 2024 she was not entitled to any lump sum allowance. She did not apply for a tax-free amount certificate.
However, Natasha’s scheme rules allow for her to commute her benefits into a lump sum up to the amount of £50,000.
On 15 June 2025, Natasha becomes entitled to a pension and commutes a portion of her benefits into a lump sum payment of £50,000. As she has no lump sum allowance left she meets the conditions for the payment to be made as a pension commencement excess lump sum.
Natasha
is entitled to a pension commencement excess lump sum of £50,000, which will be
subject to income tax at her marginal rate.
Example 3
Burt has no protections. He has previously taken a serious-ill health lump sum, using up £1,050,000 of his lump sum and death benefit allowance – leaving him with £23,100 available.
Burt is entitled to another scheme pension of £20,000 per annum and the scheme rules allow for a lump sum payment of £30,000.
On 9 July 2026, Burt wishes to take a lump sum of £30,000 as per his scheme rules. Burt initially receives a pension commencement lump sum of £23,100. This is a relevant benefit crystallisation event. This is deducted from his lump sum and death benefit allowance.
£23,100 - £23,100 = £0
As of 9 July 2026, Burt no longer has any lump sum and death benefit allowance. Burt cannot receive a pension commencement lump sum in excess of this amount, as it would be an unauthorised payment.
Now that Burt no longer has any lump sum and death benefit allowance left, he meets all the conditions and any additional lump sum payment will be a pension commencement excess lump sum.
To work out the value of the pension commencement excess lump sum, the tax-free lump sum needs to be deducted from the total lump sum payment.
£30,000 - £23,100 = £6,900
Burt is entitled to a pension commencement excess lump sum of £6,900, which will be subject to income tax at his marginal rate.
PCELS Condition: Timing of payment
Paragraph 3C(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.
PCELS Condition: Minimum age
Paragraph 3C(1)(e) Schedule 29 Finance Act 2004
The member must have reached normal minimum pension age when the lump sum is paid.
A lump sum paid earlier may be a pension commencement excess lump sum where the individual meets the ill-health condition (see PTM062100).
PCELS Condition: Excluding lump sums
Paragraph 3C(4) Schedule 29 Finance Act 2004
The lump sum payment must not be what the legislation defines as an excluded lump sum payment.
A lump sum payment is an excluded lump sum if:
- The pension which the member becomes entitled to is a collective money purchase derived drawdown pension.
- The payment would be permitted to be paid under the lump sum rules, if it could be paid instead another authorised lump sum as defined under section 166 Finance Act 2004.
Taxation of a pension commencement excess lump sum
The payment of a pension commencement excess lump sum will always be subject to income tax at the recipient's marginal rate.