Paying a Pension Commencement Excess Lump Sum

The Pension Commencement Excess Lump Sum (PCELS) is a new type of authorised lump sum introduced from 6 April 2024.

Partly because this type of benefit is new, and also because HMRC changed the rules (see sub-paragraph (10) here) for the payment of this benefit, we have received a number of queries from Aries members as to exactly when a PCELS can be paid.

As originally drafted, a PCELS could only be paid where, amongst other things, the member had none of their Lump Sum Allowance (LSA) available and the amount of the PCELS was limited to the ‘permitted maximum’ (see the first link above).

These rules were, however changed (see the second link above) such that:

- a PCELS can be paid where the member has none of their LSA available or none of their Lump Sum and Death Benefit (LSDBA) available; and

- the ‘permitted maximum’ no longer applies, although the requirement that a PCELS must be paid in connection with the member becoming entitled to an associated relevant pension still remains.

It is worth noting that, whilst a PCELS must be taken in connection with the taking of an associated pension, there is no minimum level of that associated pension (see Question 14 here).

To illustrate how this works, first consider a member who has already used up all of their LSA or all of their LSDBA. They have, say, uncrystallised under a pension scheme with a value of ￡100,000. The member can take almost all of that ￡100,000 as a PCELS (subject to the other PCELS conditions being met), provided that there is some associated pension. That associated pension could be as low as ￡1 a year (or even less, however I hope that this illustrates the point).

Now, suppose instead that the member has some LSA / LSDBA still available but will end up exceeding one or both of these allowances when they take the ￡100,00 uncrystallised benefits (and, for convenience, I will assume that it is the LSA that will be used up).

In this slightly more complicated situation, it is perhaps best to think of the case as involving two separate groups of events, although occurring at the same time.

First, the member takes some of their benefits as a pension and an associated PCLS. The PCLS taken will, I will assume, be limited by reference to the member’s available LSA. (Here, the usual PCLS ‘permitted maximum’ rules apply with the PCLS typically being limited to the lower of the available LSA, the available LSDBA and the ‘applicable amount’ – which is in effect, the usual 25% limitation.)

In order to take a PCLS of up to the member’s remaining available LSA, they will have to take an associated pension (so, both the PCLS and the associated pension will use up some of the member’s uncrystallised benefits).

At this point, of course, the member has no LSA available and has some remaining uncrystallised benefits. The case, then, almost falls into the scenario described above – the slight difference is that the member can now take all of their remaining uncrystallised benefits as a PCELS, on the basis that they are indeed becoming entitled to an associated pension under the scheme (this being the pension that is needed to support the PCLS).

There are, however, other pitfalls to be aware of.

The first of these is that a PCELS cannot generally be paid by a money purchase arrangement. One of the restrictions on the payment of a PCELS is that it cannot be paid where “it would, apart from this paragraph, be permitted to be paid under the lump sum rule in Section 166 [of the Finance Act 2004]”. [Paragraph 3C (4) (a) of Schedule 29 of the Finance Act 2004]

As explained in Question 13 here, a money purchase arrangement can usually provide a lump sum by way of an Uncrystallised Pensions Fund Lump Sum (UFPLS) and, if a UFPLS is available, the scheme cannot pay a PCELS instead.

(There are some circumstances under which a money purchase arrangement cannot pay a UFPLS, such as where the benefits involved represent a disqualifying pension credit. In these cases, as a UFPLS is not available, the scheme might be able to pay a PCELS instead.)

It is worth noting here that the payment of a UFPLS would trigger the Money Purchase Annual Allowance for the member, whilst the payment of a PCELS would not.

In addition, a PCELS cannot be paid in respect of contracted out rights. Regulation 18 (Section 9 (2B) rights) and Regulation 25 (GMPs) of The Occupational Pension Schemes (Schemes that were Contracted-out) (No.2) Regulations 2015 [SI 2015 / 1677] specify the circumstances in which contracted out rights can be paid as a lump sum and the payment of a PCELS is not one of those permitted circumstances.

On a slightly more positive note, the restriction that I mentioned in my article here has now been corrected.

As I have said, the PCELS is a new type of benefit that schemes may still be getting to grips with, however I hope the above clarifies some of the rules that apply.

Aries Insight?provides comprehensive and detailed guidance on the application of the PCELS rules, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.? If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.