PTM063230 - Member benefits: lump sums: Pension commencement lump sum (PCLS): general limits information
Source: gov.uk (2025-09-16)


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 (https://webarchive.nationalarchives.gov.uk/ukgwa/20240305022829/https:/www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm090000). If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives (https://webarchive.nationalarchives.gov.uk/ukgwa/20240305022836/https:/www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm080000).

Glossary PTM000001 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm000001)

The maximum level of pension commencement lump sum payable (#IDA1TEIC) Definition of permitted maximum (#PERMAX) Payment of a pension commencement lump sum where there is a disqualifying pension credit (#IDANXEIC) Protection of pension commencement lump sum entitlements that arose before 6 April 2006 (#IDACWEIC) Lump sum-only schemes or arrangements (#IDAQ1EIC)

The maximum level of pension commencement lump sum payable

Paragraphs 1(2), 2 to 2D and 3 schedule 29 Finance Act 2004

The maximum level of pension commencement lump sum that can be paid under an arrangement at a given time is referred to as the ‘permitted maximum’.

A scheme can pay a member a higher lump sum, if they so wish. But any amount over the permitted maximum will not be a pension commencement lump sum. However, if the excess payment was paid with the intention of being a pension commencement lump sum and is authorised under the Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171, then it will be accepted as being an authorised payment. For the purposes of the tax rules, it will be treated as a pension commencement lump sum (see PTM063260 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063260)). If none of the above-mentioned regulations apply, it will be an unauthorised member payment and taxed accordingly.

Definition of permitted maximum

Paragraph 2, 2A, 2B schedule 29 Finance Act 2004

The permitted maximum is defined in the legislation as being the lower of the following amounts. These are:
- the applicable amount
- the available lump sum allowance of the individual entitled to the lump sum.
- the available lump sum and death benefit allowance of the individual entitled to the lump sum.
Full details on how to calculate the available portion of the member’s lump sum allowance and lump sum and death benefit allowance can be found at PTM171000 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm171000) and PTM172000 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm172000).

In broad terms the applicable amount represents 25% of the capital value of the benefits coming into payment under the relevant arrangements under the scheme generating the lump sum payment, but ignoring any disqualifying pension credit held. See PTM063240 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063240) for full guidance on how to calculate the applicable amount.

However, where a member was paid a lump sum in anticipation of the entitlement to their scheme pension, lifetime annuity or income withdrawal arising within 6 months, but died before that entitlement had arisen, the lump sum payment can be treated as a pension commencement lump sum to the extent that it does not exceed the amount of the available portion of the member’s lump sum allowance immediately before their death. The applicable amount calculation does not come into play.

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Payment of a pension commencement lump sum where there is a disqualifying pension credit

Paragraphs 2 to 2D schedule 29 Finance Act 2004

If all or part of the benefit entitlement from a registered pension scheme comes from a ‘disqualifying pension credit’, those pension credit rights are not included when calculating the maximum applicable amount of pension commencement lump sum that can be paid.

As the permitted maximum is the lower of the applicable amount and the available portion of the member’s lump sum allowance then, where all the member’s rights under an arrangement relate to a disqualifying pension credit, the permitted maximum is nil (as the applicable amount is nil). So, a lump sum cannot be treated for tax purposes as a pension commencement lump sum in such cases. This will not change no matter how high the available portion of the member’s lump sum allowance is.

Where only part of the arising benefit entitlement represents a disqualifying pension credit the applicable amount is discounted proportionately.

Definition of a disqualifying pension credit

Section 278A Finance Act 2004

A pension credit is a disqualifying pension credit if at the time the pension credit was created, the member’s ex-spouse or former civil partner’s pension that was being shared with the member was actually in payment.

If the pension credit arose from the member’s ex-spouse or former civil partner's benefit that had not yet come into payment at that time, it is not a disqualifying pension credit. The position is not affected where the member’s ex-spouse‘s or former civil partner's benefits come into payment after the creation of that pension credit.

Reason for exclusion

The purpose behind this exclusion is to ensure that where a pension in payment is split through a pension sharing order, the person who is provided with the pension credit will not be able to take a tax-free lump sum from the benefit rights that are acquired. This is on the basis that when the member’s ex-spouse or former civil partner’s benefits first came into payment, that ex-spouse or former civil partner will have taken (or had the opportunity to take) a tax-free lump sum in respect of the benefits, so it would not be appropriate to allow a lump sum to be taken free of Income Tax from the pension credit rights. This applies regardless of whether a lump sum was actually taken by the pension debit member.

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Protection of pension commencement lump sum entitlements that arose before 6 April 2006

Paragraphs 24 to 34 schedule 36 Finance Act 2004

Some members, on 5 April 2006, had the right to be paid a tax-free lump sum of more than the permitted maximum for a pension commencement lump sum. The legislation protects the rights to be paid a larger tax-free lump sum by altering the permitted maximum for a pension commencement lump sum. The guidance at PTM063240 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063240) does not apply to such lump sum payments, instead see the guidance pages relating to the relevant form of lump sum protection.

The forms of lump sum protection that allow for payment of a larger pension commencement lump sum are:
- where the member has primary protection (but not valid enhanced protection) and lump sum rights of more than £375,000 on 5 April 2006 - see PTM176220 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm176220)
- where the member has enhanced protection (with or without primary protection) and lump sum rights of more than £375,000 on 5 April 2006 - see PTM176310 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm176310)
- scheme-specific lump sum protection – where neither of the above protections applies and under a particular pension scheme the member had the right to take more than 25% of their benefits as a tax-free lump sum - see PTM063130 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063130) for the payment conditions and how to calculate the maximum lump sum.
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Lump sum-only schemes or arrangements

Paragraphs 1 to 2D schedule 29 Finance Act 2004

A lump sum payment can only be a pension commencement lump sum where the member becomes entitled to actually receive a pension benefit from an arrangement under the same registered pension scheme.

The permitted maximum pension commencement lump sum is also linked to the amount of the connected pension. Because of these conditions it is not possible for a pension scheme to pay a 100% lump sum as a pension commencement lump sum.

Before 6 April 2006 some individuals had the right to have all their benefits under a pension scheme paid as a tax-free lump sum. There is another type of authorised lump sum that may allow such individuals to have all their benefits under a scheme paid as a tax-free lump sum. This type of lump sum is called a stand-alone lump sum. The conditions for paying a stand-alone lump sum depend on the form of underlying lump sum protection. For guidance on the payment conditions for a stand-alone lump sum, go to:
- PTM176310 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm176310) - for members with on 5 April 2006 had total lump sum rights of more than £375,000 and have valid enhanced protection.
- PTM176220 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm176220) - for individual who on 5 April 2006 had total lump sum rights of more than £375,000 and have primary protection and no valid enhanced protection.
- PTM063140 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063140) (stand-alone lump sum section) - for individuals with scheme-specific lump sum protection.
Lump sum-only arrangements

The tax legislation allows schemes some flexibility in paying different types of benefit from different arrangements in the same scheme. A pension commencement lump sum can be paid from one arrangement based upon an arising pension entitlement under another of the member’s arrangements under the scheme. This means that a member can be given the choice of drawing their pension commencement lump sum from one source under a scheme, provided they have sufficient pension entitlement arising somewhere else in the scheme.

For example, if a scheme is set up in such a way as to hold the member’s additional contributions (AVCs) in a separate arrangement to that of the main scheme benefit, the member may choose to take their permitted lump sum entitlement under the scheme from their AVC arrangement, rather than through commutation of their main scheme benefits. This lump sum can still qualify as a pension commencement lump sum.

Example

Terry holds uncrystallised benefits under two arrangements in a registered pension scheme.

Under arrangement A, a defined benefit arrangement, Terry is entitled to a scheme pension of £10,000 per annum. A pension commencement lump may be paid by commuting part of this pension entitlement.

Arrangement B is a money purchase arrangement, that is not a collective money purchase arrangement, holding £100,000 of uncrystallised funds. The scheme rules state that these funds can only be used to purchase a lifetime annuity, although a lump sum may be provided by commutation.

The scheme rules give Terry the option of taking his lump sum entitlement under arrangement A through arrangement B. This effectively allows him to aggregate his lump sum entitlements under both arrangements A and B in arrangement B.

Terry draws a £75,000 pension commencement lump sum from arrangement B, using the remaining £25,000 to purchase a lifetime annuity. Arrangement A provides the full £10,000 per annum scheme pension.

The lump sum paid under arrangement B is justified on the basis of Terry’s total pension entitlements arising under the scheme.

The applicable amount based on his arising scheme pension entitlement arising under arrangement A is £66,667 (£66,667 + £200,000 {£10,000 x the relevant valuation factor of 20}, divided by four - see PTM063240 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063240)).

The applicable amount based on the lifetime annuity purchase under arrangement B is £8,333 (one third of the annuity purchase price of £25,000 - see PTM063240 (https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063240)).

The total applicable amount is therefore £75,000. Terry has not crystallised benefits up to the lump sum and death benefit allowance, so the available portion of the member’s lump sum allowance does not restrict the applicable amount of £75,000.