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Taking a PCLS after age 75 and the maximum payment that can be made

Paul Squirrell

Paul Squirrell - Head of Retirement and Savings Development

Question:

My client is approaching age 75 and still has some uncrystallised money purchase benefits remaining. Could you explain the rules for taking Pension Commencement Lump Sum (PCLS) payments beyond their 75th birthday and the maximum payment that can be made?

Paul’s answer:

George Osborne’s first budget in June 2010 made several significant changes to pension legislation. This included the removal of compulsory annuitisation and the requirement to take all PCLS before age 75. These changes were introduced as part of the Finance Bill 2011.

Whilst the 2023 Spring Finance Bill removed LTA tax charges for the 2023/24 tax year, the LTA rules are still in operation for the current tax year and are a relevant consideration for calculating the maximum PCLS that may be available.

As such, to understand the rules for PCLS payments beyond age 75, it is first worth reminding ourselves of the general PCLS rules. To avoid additional complication, I will keep to the rules for a client without any pre-April 2006 lump sum protection. Further details on lump sum protection can be found in the Pension Tax Manual at PTM063100.

Permitted maximum

The maximum level of PCLS that can be paid under an arrangement at a given time is referred to as the “permitted maximum”, which will be the lower of:

  • The available portion of the individual’s lump sum allowance, and
  • The applicable amount.

Generally speaking, the available portion of the member’s lump sum allowance is 25% of their remaining lifetime allowance (LTA) at the point of crystallisation. This is based on the standard lifetime allowance, unless the individual has fixed or individual LTA protection. For individuals with enhanced or primary protection (but no lump sum protection), the lifetime allowance figure used will be £1,500,000.

In broad terms, the “applicable amount” represents 25% of the capital value of benefits coming into payment (in other words, the total funds being crystallised) under the arrangement generating the PCLS payment. Any disqualifying pension credit held should be ignored (i.e., pension credits from post-April 2006 crystallised arrangements following divorce or dissolution of a civil partnership).

Example

Let’s look at a client with FP2016 (£1.25m) who has previously used 50% of their lifetime allowance and has £500,000 in uncrystallised money purchase funds remaining (with no disqualifying pension credits). Assuming the full remaining benefits are crystallised, the permitted maximum would be the lower of:

  • The available portion of the client’s lump sum allowance (£1.25m @ 50% = £625,000) x 25% = £156,250
  • The applicable amount = £500,000 x 25% = £125,000.

So, in this case the permitted maximum would be £125,000. If the same client had uncrystallised funds of £700,000 and wished to crystallise this amount in full, then the applicable amount would be £175,000. However, the available portion would remain at £156,250, meaning the permitted maximum would also be £156,250.

PCLS beyond age 75

If a client has uncrystallised benefits on their 75th birthday, then they will be tested against the lifetime allowance under BCE 5 (defined benefit) or BCE 5B (money purchase). This test will use up some or all of the individual’s remaining lifetime allowance. However, for the purpose of calculating whether the client has available lifetime allowance when calculating PCLS entitlement after age 75, we need to do the following:

  • Disregard any lifetime allowance used by BCE 5 or BCE 5B, but
  • Take into account any BCE or event that would have been a BCE if it had occurred before the member’s 75th birthday, as if it were a BCE that used up lifetime allowance.

In other words, this second point will include any previous post-75 “BCE” crystallisation events. Importantly, it will also include any test that occurred under BCE 5a (age 75 having previously designated funds as a drawdown pension). Therefore, if your client is approaching age 75 with uncrystallised funds and intends to take PCLS after this age, it is advisable to check the impact of any BCE 5a tests that may occur on existing drawdown arrangements in order to determine whether this will affect the availability of PCLS after their 75th birthday.

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Important information

This article provides information and is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. The value of benefits depends on individual circumstances. The minimum age clients can normally access their pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless they have a lower protected pension age. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.

Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.

UKM0723/381912/SSO/0724