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HMRC internal manual

Pensions Tax Manual

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Member benefits: lump sums: Pension commencement lump sum (PCLS): available portion

Glossary PTM000001
   

Available portion of the member’s lump sum allowance 
Establishing the available portion of the member’s lump sum allowance where the member is entitled to the standard lifetime allowance 
Establishing the available portion if the member has an enhanced lifetime allowance 
How the legislation defines the available portion of the member’s lump sum allowance 
How the legislation defines the available portion of the member’s lump sum allowance where the member has primary protection or enhanced protection 
When a lump sum paid before 6 April 2006 is included in the calculation of the member’s available portion 
Examples of calculating the available portion

Available portion of the member’s lump sum allowance

Section 217 and paragraph 2(5) to (8) Schedule 29 Finance Act 2004

The purpose of the lump sum allowance test is to provide a lifetime cap on the amount of the pension commencement lump sums the member may draw over their lifetime, in line with the lifetime allowance. The lump sum allowance restricts the total tax-free lump sum payments that may be paid to an individual, from all registered pension schemes, to 25 per cent of the standard lifetime allowance.

Test is always against the standard lifetime allowance

Paragraph 2(6) Schedule 29 Finance Act 2004

The above cap is always measured against the standard lifetime allowance, even where the individual is entitled to an enhanced lifetime allowance (unless the member is entitled to protection from the lifetime allowance - see PTM092000). So where the individual has already crystallised benefits up to the level of the standard lifetime allowance, any further benefits that crystallise will not be able to generate a pension commencement lump sum entitlement. But it should be remembered that if an individual has fixed protection, fixed protection 2014 or individual protection 2014 their standard lifetime allowance may be different (see PTM091000 for more details).

How the above is provided for in the legislation

The legislation provides for the calculation of the available portion of the member’s lump sum allowance using a similar formula as is used for lifetime allowance purposes.

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Establishing the available portion of the member’s lump sum allowance where the member is entitled to the standard lifetime allowance

Section 217 and paragraph 2(5) to (8) Schedule 29 Finance Act 2004

Regulations 13 and 14 The Registered Pension Schemes (Provision of Information Regulations 2006) - SI 2006/567

Where there is no entitlement to an enhanced lifetime allowance or protected lifetime allowance, the lump sum allowance is the percentage of the member’s lifetime allowance that the member has available at that point, as applied to the standard lifetime allowance for that particular tax-year. And 25% of this figure is the available portion of that lump sum allowance.

If the result comes out as a negative figure, there is no available portion of the member’s lump sum allowance and the permitted maximum will be nil.

Before crystallising benefits and making any payments the scheme administrator should satisfy themselves that the member has enough available lifetime allowance to cover the benefits crystallising at the time the pension commencement lump sum crystallises through BCE 6 (see PTM088670). They are also likely to clarify whether the member is entitled to an enhanced lifetime allowance or protected lifetime allowance.

In addition, where the lump sum is being paid after age 75 from uncrystallised funds or rights, those funds or rights will have already been tested against the member’s lifetime allowance under BCE 5 or BCE 5B as appropriate when the member reached age 75 (see PTM088650). This BCE will have used up some or all of the member’s available lifetime allowance at that time. In such cases, and solely for the purposes of deciding whether the member satisfies the condition that they have available lifetime allowance, when a lump sum is taken after age 75:

* the fact that a BCE 5 or BCE 5B has occurred is disregarded. This means that any LTA used up by that BCE does not count in calculating whether the member has available lifetime allowance, and
* if the member has already taken benefits from the same or another arrangement under a registered pension scheme after reaching age 75 or some other event has occurred that would have been a BCE but for the fact that the event occurred on or after the member reaching age 75, then, again solely for the purposes of calculating whether the member has available lifetime allowance, those events are treated as though they were BCEs and so are treated as having used up lifetime allowance.

Where the scheme administrator is satisfied that the member is subject to the standard lifetime allowance, and has enough available lifetime allowance to cover the benefit crystallisation events (BCE)s occurring, the scheme administrator knows that the available portion of the lump sum allowance is not an issue. They know that this will be higher than the applicable amount, and so the maximum payment will be the figure resulting from the applicable amount calculation.

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Establishing the available portion if the member has an enhanced lifetime allowance

Section 217 and paragraphs 2(5) to (8) Schedule 29 Finance Act 2004

Regulations 13 and 14 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

Where the member is entitled to an enhanced lifetime allowance the available portion of the member’s lump sum allowance is not be the same as the member’s available lifetime allowance.

For example, a member with a lifetime allowance enhancement factor of 0.5 will have an actual lifetime allowance of 150 per cent of the standard lifetime allowance. If that individual has previously crystallised benefits equal to 80 per cent of the standard lifetime allowance they will have an available lifetime allowance of 70 per cent of the standard lifetime allowance (150 per cent - 80 per cent). But their available lump sum allowance will be only 20 per cent of the standard lifetime allowance (100 per cent - 80 per cent).

However, the available portion of the member’s lump sum allowance can still be calculated based on information the member will have to hand.

Where the member has crystallised benefits previously under another registered pension scheme they will have been provided with a statement confirming the total amount that has crystallised for lifetime allowance purposes for that, and earlier, tax years, under that scheme (see PTM164100). Unless no pension is in payment under the scheme, the administrator will provide the member with such a statement every tax year.

The total crystallised amount quoted on the statement will be expressed as a percentage of the standard lifetime allowance. The information on these statements can be easily used to calculate the individual’s available portion of the member’s lump sum allowance, as well as the individual’s available lifetime allowance. The examples later below explain how this can be done.

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How the legislation defines the available portion of the member’s lump sum allowance

The legislation works in a similar way to the legislation that defines an individual’s available lifetime allowance at a particular BCE.

Paragraph 2(6) to (8) Schedule 29 Finance Act 2004

The available portion of the member’s lump sum allowance is defined in the legislation by the following formula:

(CSLA - AAC) / 4

CSLA = the current standard lifetime allowance

AAC = the aggregate of ‘the relevant amount’ in the case of all earlier BCEs which have occurred in relation to the member each adjusted by a specified indexation factor (see below). If no such BCE has occurred, AAC equals nil.

Subject to the following exception ‘the relevant amount’ in the case of a BCE is the amount crystallised by it.

The one exception is where the BCE occurs on becoming entitled to a scheme pension under a money purchase arrangement. If so, ‘the relevant amount’ is the aggregate of:

* the amount of such sums held for the purposes of the pension scheme, and
* the market value of such of the assets held for the purposes of the pension scheme.

As applied in (or in connection with) the purchase or provision of the scheme pension and any related dependants’ scheme pension (as defined in PTM072100).

What is covered by ‘AAC’

Paragraph 2(6) Schedule 29 Finance Act 2004

The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

For the avoidance of doubt, the lump sum allowance is discounted by the amount that crystallised at all previous BCEs, and not just those relating to earlier payments of pension commencement lump sums. This is any amount that has crystallised through any BCEs since 6 April 2006.

Lump sums paid before 6 April 2006 are not normally included in the value of ‘AAC’. The exception is that a lump sum paid before 6 April 2006 but where the related pension is deferred until after 5 April 2006 is included in the value of ‘AAC’ where the conditions set out later below are met.

This sum is also discounted by any deemed crystallisation in respect of pre-commencement pensions in payment on 5 April 2006 (see PTM088300). This discount is applied where the payment of the pension commencement lump sum is the first BCE post-6 April 2006 in respect of that individual.

The position where simultaneous BCEs occur is covered in PTM088200.

Adjustment of ‘AAC’

Paragraph 2(7) Schedule 29 Finance Act 2004

The adjustment referred to above is calculated by the formula below:

CSLA / PSLA 

CSLA = the current standard lifetime allowance,

PSLA = the standard lifetime allowance at the time of the previous BCE.

The adjustment reflects the fact that the standard lifetime allowance may have changed from year to year.

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How the legislation defines the available portion of the member’s lump sum allowance where the member has primary protection or enhanced protection

Paragraphs 2(6) to (11) Schedule 29 Finance Act 2004 as amended by paragraphs 8(1) to(3) schedule 22 Finance Act 2013

This legislation applies to individuals with primary protection or who have valid enhanced protection at the time they become entitled to the lump sum. (See PTM092100)

The available portion of the member’s lump sum allowance is defined in the legislation by the following formula

(CSLA - AAC) / 4

CSLA = the greater of £1,500,000 and the current standard lifetime allowance

AAC = the aggregate of ‘the relevant amount’ in the case of all earlier BCEs which have occurred in relation to the member, each adjusted by a specified indexation factor (see below). If no such BCE has occurred, AAC equals nil.

Subject to the following exception, ‘the relevant amount’ in the case of a BCE is the amount crystallised by it.

The one exception is where the BCE occurs on becoming entitled to a scheme pension under a money purchase arrangement. If so ‘the relevant amount’ is the aggregate of:

* the amount of such sums held for the purposes of the pension scheme, and
* the market value of such of the assets held for the purposes of the pension scheme.

As applied in (or in connection with) the purchase or provision of the scheme pension and any related dependants’ scheme pension (as defined PTM072100).

What is covered by ‘AAC’

Paragraph 2(6) Schedule 29 Finance Act 2004

The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

For the avoidance of doubt, the lump sum allowance is discounted by the amount that crystallised at all previous BCEs, and not just those relating to earlier payments of pension commencement lump sums. This is any amount that has crystallised through any BCE since 6 April 2006.

Lump sums paid before 6 April 2006 are not normally included in the value of ‘AAC’. The exception is that a lump sum paid before 6 April 2006 but where the related pension is deferred until after 5 April 2006 is included in the value of ‘AAC’ where the conditions set out below are met.

This sum is also discounted by any deemed crystallisation in respect of pre-commencement pensions in payment on 5 April 2006 (see PTM088300). This discount is applied where the payment of the pension commencement lump sum is the first BCE post-6 April 2006 in respect of that individual.

The position where simultaneous BCEs occur is covered in PTM088200.

Adjustment of ‘AAC’

Paragraph 2(7) Schedule 29 Finance Act 2004

The adjustment referred to above is calculated by the formula below:

CSLA / PSLA

CSLA = the greater of £1,500,000 and the current standard lifetime allowance,

PSLA = the standard lifetime allowance at the time of the previous BCE.

The adjustment reflects the fact that the standard lifetime allowance may have changed from year to year.

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When a lump sum paid before 6 April 2006 is included in the calculation of the member’s available portion

The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572) Article 28

A member who received a tax-free lump sum before 6 April 2006 will include it in the value of ‘AAC’ in the member’s ‘available portion’ in the following circumstances:

* the payment is made from a registered pension scheme that was:

* approved for the purposes of Chapter 1 Part 14 Income and Corporation Taxes Act 1988 (ICTA), or
* a relevant statutory scheme as defined in s611A ICTA 1988 (or treated by HMRC as if it were a relevant statutory scheme), or
* an annuity contract, that does not provide for the immediate payment of benefits, used to secure benefits provided by such schemes, or
* a Parliamentary scheme or fund as mentioned in section 613(4)(b) to (d) ICTA 1988.

* the member has chosen to defer the entitlement to the related pension until after 5 April 2006 and the election to defer entitlement to the pension was made on or after 27 July 2004
* the amount that is included in the value of ‘AAC’ is the amount of the lump sum to which the member became entitled before 6 April 2006.

The pre-6 April 2006 lump sum is treated as if the member became entitled to it on 6 April 2006 and the amount treated as having been crystallised is the amount to which the member became entitled.

For the avoidance of doubt, no lifetime allowance charge is due on the amount of the lump sum treated as crystallising on 6 April 2006.

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Examples of calculating the available portion

Example 1 - where no lifetime allowance protection available

John has £312,500 of uncrystallised funds in a money purchase arrangement. He does not have an enhanced lifetime allowance or any other lifetime allowance protection. In the 2014-15 tax year, he decides to use all the funds held in the arrangement to provide a drawdown pension and the maximum pension commencement lump sum permitted.

Before paying out benefits, the scheme administrator writes to John telling him that he will crystallise £312,500 for lifetime allowance purposes, which represents 25 per cent of the standard lifetime allowance for that tax year (25 per cent of £1.25 million). The scheme administrator also asks John to provide a statement confirming his anticipated available lifetime allowance at the time he wishes to draw benefits, expressed as a percentage of the standard lifetime allowance for that current tax year, based on statements he will have been provided with by other scheme administrators where benefits have been crystallised previously under other registered pension schemes, and to confirm whether or not he is entitled to an enhanced lifetime allowance.

John has used up 85 per cent of his lifetime allowance previously. John confirms that he will have 15 per cent of the standard lifetime allowance of £1.25 million available when he draws benefits. He also confirms he is not entitled to an enhanced lifetime allowance.

The scheme administrator applies the percentage available (15 per cent) to the standard lifetime allowance for that year (£1.25 million), and divides this by four to obtain the available portion of the lump sum allowance.

So 15 per cent x £1.25 million = £187,500.

This figure divided by four gives £46,875.

The permitted maximum is therefore capped at £46,875.

The scheme administrator will also have identified a chargeable amount of £125,000 (£312,500 - £187,500). This can be paid as a lifetime allowance excess lump sum (from which the scheme administrator should deduct and pay to HMRC the lifetime allowance charge due).

Example 2 - calculating the available portion of the member’s lump sum allowance

Chris has £450,000 of uncrystallised funds in a money purchase arrangement. He is also entitled to a lifetime allowance enhancement factor (other than through primary protection) of 0.5 and his entitlement to that factor arose before 6 April 2012. So, for so long as the standard lifetime allowance is less than £1.8 million, Chris’s lifetime allowance is 150 per cent of £1.8 million i.e. £2.7 million. Chris has not protected any lump sum rights in existence on 5 April 2006.

In the 2014/15 tax year, Chris decides to use all the funds to provide a drawdown pension and the maximum pension commencement lump sum. Chris has already used up 90% of the standard lifetime allowance. So when he takes the benefits from his drawdown pension fund, he will have an available lifetime allowance of 60% of the standard lifetime allowance (150 per cent - 90 per cent). This means Chris can crystallise £1.08 million (60 per cent of £1.8 million) before exceeding his available lifetime allowance.

Before Chris draws benefits, the scheme administrator writes to him asking him for details of previous crystallisations under other schemes and whether or not he is entitled to an enhanced lifetime allowance.

Chris provides the scheme administrator with the number on the HMRC certificate confirming his entitlement to an enhanced lifetime allowance as evidence of his entitlement. He also tells the administrator that he has already used 90 per cent of the standard lifetime allowance.

The scheme administrator uses this information to work out whether or not Chris has enough available lifetime allowance to cover the amount crystallising under their scheme at that time. The scheme administrator can also use this information to identify what Chris’s available portion of the lump sum allowance actually is.

The scheme administrator now knows that Chris has used up 90 per cent of his protected £1.8 million lifetime allowance at the point benefits are crystallising for lifetime allowance purposes. The previous crystallisations, adjusted by reference to the changes in standard lifetime allowance level, or ‘AAC’, represent £1.62 million (90 per cent of £1.8 million).

So the scheme administrator knows that the available portion of the lump sum allowance is a quarter of £180,000 (£1.8 million - £1.62 million). This is £45,000.

The permitted maximum for Chris is therefore £45,000 (not the applicable amount of £112,500). Chris takes this amount as a pension commencement lump sum and uses the rest of his fund to provide drawdown pension.

But no chargeable amount arises, as the amount crystallising is covered by his available lifetime allowance.