Member benefits: lump sums: Pension commencement lump sum (PCLS): conditions and entitlement
Conditions and entitlement
Paragraph 1(3)(b) Schedule 29 Finance Act 2004
Paragraph 34(2) Schedule 10 Finance Act 2005
Normally, a lump sum may be treated for tax purposes as a pension commencement lump sum only if the member has become ‘actually entitled’ to a relevant pension benefit under the registered pension scheme making the lump sum payment. The maximum amount payable will be capped by reference to the value of that arising pension entitlement. PTM063210 explains what a relevant pension is and what is meant by an actual rather than a prospective entitlement to a benefit. The pension entitlement giving rise to the pension commencement lump sum payment does not have to arise under the same arrangement paying the lump sum. The pension commencement lump sum can be linked to an arising pension entitlement under one or more different arrangements the member may hold in the same registered pension scheme.
This allows the maximum pension commencement lump sum payable to be calculated on a scheme-wide basis, based on all that member’s entitlements arising under that scheme. And the member can be given the choice of drawing their lump sum entitlement from one source under a scheme, rather than potentially drawing two or more smaller lump sum payments from different types of arrangements held under the scheme.
For example, many registered pension schemes providing defined benefits to its members hold additional voluntary contributions (AVCs) paid by the member under a money purchase arrangement(s) thus separating them from the main scheme benefits which are held under a defined benefit arrangement(s). Instead of drawing two separate lump sum payments, each based on the pension entitlement from one of the arrangements, the scheme can give the member the option of drawing more (or all) of their total lump sum entitlement under the scheme from the money purchase arrangement(s) holding their AVC benefits. This means that the member can use any funds generated from their AVC fund to provide their entire lump sum benefit entitlement. The main scheme benefits retained in the defined benefits arrangement are then used to generate a higher scheme pension and no lump sum.
To take another example, the member may hold two policies under a scheme in different money purchase arrangements, each one with a different insurance company, and may wish to use the contract with the lower annuity rate to provide their lump sum benefit.
Where a pension commencement lump sum is paid that has been generated, either in full or in part, by cross-reference to a pension entitlement under a different arrangement under the same scheme, any lump sum entitlement arising under that other arrangement must take into account the payment from the arrangement paying the lump sum.
PTM063230 gives more information.