Pension commencement lump sum
How the lump sum allowances impact on the payment of a pension commencement lump sum
This section looks at how the new lump sum allowances impact on the payment of a pension commencement lump sum (PCLS). A PCLS is the tax-free lump sum a member is entitled to take when they start taking their pension.
The RBCE is the date the member has an actual entitlement to their benefits. Actual entitlement only arises when you have all the information and completed forms needed to make payment.
Example 1: the RBCE date
A member aged 58 is dismissed on the grounds of redundancy on 31 December 2024.They return their completed election forms on 31 May 2025.
The RBCE will be 31 May 2025 at the earliest, if you have everything else you need to pay the benefits. Otherwise, it will be a later date when you have all the necessary documentation.
Once you have established the date of the RBCE you must test the PCLS against the member’s available LSA and LSDBA on this date.
Lump sums are calculated in accordance with Secretary of State guidance / Scottish Ministers guidance. If a member has an AVC fund and they are taking some or all of it as tax-free cash, it should be added to the main scheme lump sum. Interest for late payment is not included.
If the member has more than one RBCE on the same day, they must decide which RBCE is first and inform both scheme administrators. This works in the same way as under the LTA regime if more than one BCE took place on the same day.
The maximum PCLS
The maximum PCLS is the lowest of:
- 25 per cent of the capital value the member is crystallising
- their available LSA immediately before the member becomes entitled to the lump sum
- their available LSDBA immediately before the member becomes entitled to the lump sum.
For most LGPS members, the maximum PCLS will still be 25 per cent of the capital value of the benefits they are crystallising with you.
Timing conditions for payment of a PCLS
Timing conditions for payment of a PCLS remain as follows:
- it must be paid within an 18-month period starting six months before and ending 12 months after the member becomes entitled to it – this is the date of the RBCE. Entitlement occurs on the day the member has an actual entitlement.
- the member must have reached normal minimum pension age (NMPA) – or in some cases a lower protected pension age, unless entitlement has arisen because the member meets the ill-health condition in which case it can be paid before NMPA.
The requirement for the PCLS to be paid in connection with a relevant pension also remains.
Paying supplementary pensions increase
Paying supplementary pensions increase (PI) on a PCLS is a new RBCE, just as it was a new BCE before 6 April 2024.
Technically this means that you should ask members again about any previous pension benefits they have taken since the original BCE/RBCE. This is to allow you to assess their available LSA and LSDBA at the new RBCE date. You should also provide the member with an RBCE statement.
When paying supplementary PI, you should bear in mind that a member has to apply for a TTFAC before their first RBCE after 5 April 2024.
Testing the PCLS against the available LSA and LSDBA
If a member elects to take a PCLS when they take their LGPS pension benefits, you will need to check it fits within their available LSA and LSDBA.
Example 2: PCLS – no previous benefits paid
The member has an RBCE on 31 May 2025. They elect to take payment of their LGPS pension and a PCLS of £20,000.
They have not taken payment of any pension benefits previously.
Immediately before the RBCE their available LSA is £268,275 and available LSDBA is £1,073,100.
Following the RBCE their available lump sum allowances are:
- LSA: £268,275 – £20,000 = £248,275
- LSDBA: £1,073,100 – £20,000 = £1,053,100
Example 3: PCLS – previous benefits paid after 5 April 2024
The member has an RBCE in the LGPS on 31 March 2027. They elect to take payment of their LGPS pension and a PCLS of £80,000.
They have previously taken payment of benefits from other schemes:
- a £450,000 SIHLS (under age 75) – RBCE date 31 October 2026
- a £50,00 tax free element of an UFPLS – RBCE date 31 May 2025
Immediately before the RBCE the available allowances are:
- LSA: £268,275 – £50,000 = £218,275
- LSDBA: £1,073,100 – £450,000 – £50,000 = £573,100
Following the RBCE the available allowances are:
- LSA: £268,275 – £50,000 – £80,000 = £138,275
- LSDBA: £1,073,100 – £450,000 – £50,000 – £80,000 = £493,100
Example 4: PCLS – pre-commencement pension in payment
The member has an RBCE on 31 March 2027. They elect to take payment of their LGPS pension and a PCLS of £27,000.
They have not had any previous RBCEs or BCEs. They are in receipt of a pre-commencement pension. The value of the pre-commencement pension at the RBCE date is £25,000 a year.
Immediately before the RBCE their available allowances are:
Following the RBCE the available allowances are:
- LSA: £112,025 – £27,000 = £85,025
- LSDBA: £916,850 – £27,000 = £889,850
Example 5: PCLS – previous BCE with standard transitional calculation
They had a BCE on 1 December 2022 – this used 50 per cent of their LTA. They do not hold a TTFAC and they have not been paid a SIHLS.
Immediately before the RBCE their available allowances are:
- LSA: £268,275 – ((£1,073,100 × 0.5) × 0.25) = £134,137
- LSDBA: £1,073,100 – ((£1,073,100 × 0.5) × 0.25) = £938,963
Following the RBCE the available allowances are:
- LSA: £134,137 – £55,000 = £79,137
- LSDBA: £938,963 – £55,000 = £883,963
Example 6: PCLS – previous BCE with TTFAC
The member has an RBCE on 31 July 2024. They elect to take payment of their LGPS pension and a PCLS of £55,000.
They had a BCE on 1 December 2022 that used up 80 per cent of their LTA.
The member has a TTFAC stating their:
- LSA transitional tax-free amount is £150,000
- LSDBA transitional tax-free amount is £400,000
The member must use their TTFAC. Immediately before the RBCE their available allowances are:
- LSA: £268,275 – £150,000 = £118,275
- LSDBA: £1,073,100 – £400,000 = £673,100
Following the RBCE the available allowances are:
- LSA: £118,275 – £55,000 = £63,725
- LSDBA: £673,100 – £55,000 = £618,100
Example 7: PCLS – previous RBCE and BCE with TTFAC
The member has an RBCE on 31 October 2026. They elect to take payment of their LGPS pension and a PCLS of £55,000.
They had a previous RBCE on 30 April 2024 when they were paid a PCLS of £57,000.
On 1 December 2022 they had a BCE using up 80 per cent of their LTA.
A TTFAC was issued before the first RBCE on 30 April 2024. It states:
- LSA transitional tax-free amount = £131,275
- LSDBA transitional tax-free amount = £900,000
The member must use the TTFAC. Immediately before the RBCE on 31 October 2026 their available allowances are:
- LSA: £268,275 – (£131,275 + £57,000) = £80,000
- LSDBA: £1,073,100 – (£900,000 + £57,000) = £116,100
Following the RBCE the available allowances are:
- LSA: £80,000 – £55,000 = £25,000
- LSDBA: £116,100 – £55,000 = £61,100
Example 8: PCLS and PCELS – 100% of LTA used – standard transitional calculation
They had a BCE on 31 March 2021 which used up 100 per cent of their LTA. They do not hold a TTFAC and have not taken a SIHLS. Immediately before the RBCE their available allowances are:
- LSA: £268,275 – ((£1,073,100 × 1.0) × 0.25) = £0
- LSDBA: £0
As the member has used up 100 per cent of their LTA, the legislation states they have no available LSDBA.
The maximum PCLS is the lowest of:
- 25% of capital value = ((£12,000 × 120) ÷ 7) × 0.25 = £51,428
- available LSA = £0
- available LSDBA = £0
- As the member has no available lump sum allowances, any lump sum must be paid as a PCELS. This will be subject to income tax at the member’s marginal rate See the PCELS section for the rules on paying a PCELS.
- Note: if this member had used 99 per cent of their LTA, the LSA and LSDBA available immediately before the RBCE would be:
- LSA: £268,275 – ((£1,073,100 × 0.99) × 0.25) = £2,682.75
- LSDBA: £1,073,100 – ((£1,073,100 × 0.99) × 0.25) = £807,507
Whilst this does not make a big difference to the amount of PCLS that can be taken, the difference in the available LSDBA is significant. This could have an impact on future RBCEs eg the payment of a death grant. We have queried this with HMRC as the outcome does not seem equitable. Members who have used 100 per cent of their LTA may wish to apply for a TTFAC.
Note: any DBLSDB or UFLSDB paid in respect of the BCE that took place on 31 March 2021 would not be an RBCE. This is because the benefits have already been tested against the LTA. This is called a transitional lump sum death benefit.
Example 9: PCLS – 100 per cent of the LTA used with TTFAC
The member has an RBCE on 31 July 2024. They elect to take their LGPS pension and a PCLS of £20,000.
They had a BCE on 31 March 2021 which used up 100 per cent of their LTA. They hold a TTFAC stating that both the LSA and LSDBA transitional tax-free amounts are £0. This is because their LTA was used up by a transfer to a QROPS, the member did not receive a tax-free lump sum.
The member must use the TTFAC. Immediately before the RBCE their available allowances are:
- LSA: £268,275 – £0 = £268,275
- LSDBA: £1,073,100 – £0 = £1,073,100
Following the RBCE the available allowances are:
- LSA: £268,275 – £20,000 = £248,275
- LSDBA: £1,073,100 – £20,000 = £1,053,100
Example 10: PCLS – previous BCE 5 with standard transitional calculation
The member has an RBCE on 30 April 2024. They have built up a pension of £21,000.
On 15 March 2023 they had a BCE5 as they reached age 75 but had not taken payment of their benefits. This used up 50 per cent of their LTA.
The member does not hold a TTFAC and has no LTA protections. Immediately before the RBCE their allowances are:
- LSA: £268,275
- LSDBA: £1,073,100
The maximum PCLS is the lowest of:
- 25% of capital value = ((£21,000 × 120) ÷ 7) × 0.25 = £90,000
- available LSA = £268,275
- available LSDBA = £1,073,100
Note: the capital value is calculated using the reiterative method.
The lowest of the three values is £90,000.
Following the RBCE the available allowances are:
- LSA: £268,275 – £90,000 = £178,275
- LSDBA: £1,073,100 – £90,000 = £983,100.
The member’s LSA and LSDBA were not reduced by the BCE 5 because paragraph 129(4C) of the Finance Act 2024 provides those benefits crystallised by BCEs 5, 5A and 5B are all deducted from the LTA previously used amount.
This aligns with their treatment under the LTA regime, where values crystallised at these BCEs were disregarded when determining a member’s available LTA for the purpose of paying a PCLS.
Example 11: PCLS and PCELS – previous SIHLS standard transitional calculation
The member has an RBCE on 30 April 2024. They have built up a pension of £35,000.
On 15 March 2023 they were paid a SIHLS from another pension scheme when they were under age 75. This used up 50 per cent of their LTA.
The member does not hold a TTFAC. Immediately before the RBCE their available allowances are:
- LSA: £268,275 – ((£1,073,100 × 0.5) × 0.25) = £134,137
- LSDBA: £1,073,100 – (£1,073,100 × 0.5) = £536,550
The maximum PCLS is the lowest of:
- 25% of capital value = ((£35,000 × 120) ÷ 7) × 0.25 = £150,000
- available LSA = £134,137
- available LSDBA = £536,550.
Note: the capital value is calculated using the reiterative method.
The lowest of the three values is £134,137.
MHCLG/SPPA are currently considering whether to:
- allow PCELSs to be paid from the LGPS, and
- if so, whether to limit the proportion of benefits that can be taken as a PCELS and what that limit should be.
They plan to consult on changes to scheme rules shortly. In the meantime, they have confirmed that where a member’s lump sum exceeds the LSA or LSDBA, you must offer them the ability to take benefits that would have been in excess of the LTA as a PCELS. This is required by the transitional provisions included in the Finance Act 2024. SPPA is currently reviewing the legislation and expects to confirm its view to Scottish authorities shortly.
Payment of a PCELS is subject to the conditions set out in the PCELS section of this guide. In this example, we assume the member has no contracted-out rights.
Step 1: commuting up to the available LTA limit
- Annual pension: (£35,000 – (£134,137 ÷12)) = £23,822
- Lump sum: £134,137
Step 2: calculating the excess pension over the available LTA
- (£1,073,100 × 0.5) – £134,137 ÷ 20 = £20,121
- Excess pension: £23,822 – £20,121 = £3,701
- Maximum taxable lump sum: £3,701 × 12 = £44,412
Maximum lump sum payable:
- PCLS: £134,137
- PCELS: £44,412
- Annual pension: £20,121
The PCELS is taxed at the member’s marginal rate of income tax. It must be paid and reported through PAYE payroll reporting.
Following the RBCE the available allowances are:
- LSA: £134,137 – £134,137 = £0
- LSDBA: £536,550 – £134,137 = £402,413
In this example, the LSA is reduced by 25 per cent of the SIHLS and the LSDBA is reduced by 100 per cent of the SIHLS. The next example shows the impact of a TTFAC.
Example 12: PCLS – previous SIHLS with TTFAC
The member from the previous example holds a TTFAC stating that:
- LSA transitional tax-free amount is £0
- LSDBA transitional tax-free amount is £536,550
The member must use their TTFAC. Immediately before the RBCE their available allowances are:
- LSA: £268,275
- LSDBA: £536,550
The maximum PCLS is the lowest of:
- 25% of capital value = ((£35,000 × 120) ÷ 7) × 0.25 = £150,000
- available LSA = £268,275
- available LSDBA = £1,073,100.
Note: the capital value is calculated using the reiterative method.
The lowest of the three values is £150,000.
Following the RBCE the available allowances are:
- LSA: £268,275 – £150,000 = £118,275
- LSDBA: £536,550 – £150,000 = £386,500.
The member’s LSA was not reduced by the SIHLS at the RBCE because they hold a TTFAC.
Example 13: PCLS – member worse off with TTFAC
The member has an RBCE on 31 July 2024. They elect to take payment of their LGPS pension and PCLS of £50,000.
They had a BCE on 31 December 2010 which used up 78 per cent of their LTA. When the member crystallised these benefits, they were able to take a PCLS of £300,000 because the LTA was £1,800,000.
Immediately before the RBCE their available allowances are:
- LSA: £268,275 – ((£1,073,100 × 0.78) × 0.25) = £59,021
- LSDBA: £1,073,100 – ((£1,073,100 × 0.78) × 0.25) = £863,846
Following the RBCE the available allowances are:
- LSA: £59,021 – £50,000 = £9,021
- LSDBA: £863,846 – £50,000 = £813,846
If the member had applied for a TTFAC, their available LSA would be £0. This is because the certificate would detail the actual PCLS paid of £300,000, which is higher than the current LSA. In this scenario the member has a greater LSA without the TTFAC, despite previously taking less than 25 per cent of the capital value of their benefits as a PCLS.