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Neil MacGillivray: How much tax-free PCLS is available?

neill macgillivrayTaking a tax-free lump sum when accessing pension benefits seems straightforward but protection can affect how much a client is entitled to

Pension marketing material invariably makes reference to an individual’s ability to take a portion of their retirement fund as a tax-free lump sum. This pension commencement lump sum is an attractive feature when saving through a registered pension scheme.

But an important question to ask is: how much tax-free PCLS is available from a pension scheme? While this may seem like an obvious question, there are several factors to consider.

PCLS is restricted by the “permitted maximum”, although scheme rules may mean a lower amount is available. Subject to scheme rules and the minimum age condition, PCLS can be taken at any time.

That said, taking it before the age of 75 triggers a benefit crystallisation event (BCE 6) and a lifetime allowance test. The BCE 6 is deemed to occur before the BCE associated with the linked pension.

Because of this, and the way the permitted maximum is defined, there are two scenarios where PCLS might attract a lifetime allowance charge. These are where the individual either has the form of PCLS protection associated with primary protection, or has scheme-specific lump sum protection.

Permitted maximum categories
The permitted maximum is determined by one of four categories the individual comes under at the time of payment. In this article, I will be tackling the first one, where the individual has no PCLS protection.

The permitted maximum is the lower of 25 per cent of the value of the benefits coming into payment and the cap. In legislation, the cap is known as “the available portion of the member’s lump sum allowance” and is defined by the following formula: (CSLA – AAC) / 4.

Here, CSLA is the current standard lifetime allowance and AAC is the aggregate of “the relevant amount” in the case of all earlier BCEs in relation to the individual, each adjusted by an indexation factor.

The relevant amount in the case of a BCE is the amount crystallised at the event, with the exception of a scheme pension secured from a money purchase arrangement where the scheme pension purchase price is used.

The indexation factor is: CSLA / PSLA. Here, PSLA represents the standard lifetime allowance at previous BCE(s).

Where an individual holds a form of fixed or individual protection at a BCE, then CSLA and PSLA reflect the lifetime allowance applicable to the individual at the BCE.

However, if the individual holds either enhanced or primary protection, CSLA and PSLA are as follows:

  • CSLA is £1.5m where greater than the CSLA;
  • PSLA is £1.5m where greater than the standard lifetime allowance at the previous BCE, and where the current and previous BCEs both occurred post-5 April 2014. Otherwise, it is the standard lifetime allowance at the previous BCE.

It is important to know the amounts crystallised under BCE 5 or BCE 5B at age 75 are ignored. However, if some other event occurred that would have been a BCE, but for the fact it happened on or after the individual reaching 75, a BCE is deemed to have occurred.

Where the individual has no lifetime allowance protection or holds a form of fixed or individual protection, the cap formula can be simplified by using the percentage of the lifetime allowance used up from any previous BCE.

The lifetime allowance used up by a scheme pension from a money purchase arrangement would again be calculated based on the scheme pension purchase price.

Armed with the above detail, let’s consider two examples:

Example one
Kelly, 70, is about to fully crystallise her Sipp currently valued at £400,000. She has fixed protection 2016. Her only previous BCE was in 2007/08 (SLA = £1.6m) where the total amount crystallised was £1.12m. She has no lump sum protection.

What is the maximum PCLS under her Sipp?

  • BCE 2007/08: £1.12m/£1.6m = 70 per cent of her lifetime allowance has been used up. Therefore, 30 per cent remains;
  • PCLS permitted maximum cap = 25 per cent (30 per cent of £1.25m) = £93,750;
  • Maximum PCLS available is £93,750 and not £100,000 (25 per cent of £400,000);
  • Cap formula: £1.25m – (£1.12m x £1.25m/£1.6m) / 4 = £93,750.

Example two
Hector, 70, is about to fully crystallise his Sipp currently valued at £400,000. He has enhanced protection and no lump sum protection.

His only previous BCEs were in 2007/08 (SLA = £1.6m) and in 2014/15 (SLA = £1.25m), and total amounts crystallised were £1.12m and £45,000 respectively.

What is the maximum PCLS under his Sipp?

  • PCLS permitted maximum cap = CSLA – AAC / 4 = £1.5m – £1.095m / 4 = £101,250;
  • Maximum PCLS available is therefore £100,000 (25 per cent of £400,000).

As previously mentioned, I have only covered one of the four permitted maximum categories – when an individual has no form of PCLS protection – and this has probably caused enough of a headache.

In my next article I will take on the other three categories, which will consider the added complexities of those who do have forms of PCLS protection.

Neil MacGillivray is head of technical support at James Hay


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Neil – maybe I haven’t taken enough time to read through the examples, but I’m not sure I am following them. Isn’t it the case that the underpin to CSLA applies solely and specifically for the purpose of calculating the current PCLS entitlement, but actual LA used by BCEs is still calculated based on the prevailing standard LA?

  2. Samantha Prince-Mernick 7th June 2019 at 8:35 am

    Hi Mark,

    The calculation of lifetime allowance usage follows different rules. In cases where the individual has no form of lifetime allowance protection the lifetime allowance used at a BCE is based on the standard lifetime allowance. However, if the individual holds one of the forms of fixed or individual protection, the lifetime allowance usage is based on the personal lifetime allowance held by the individual.

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