Following the pension announcements in the Budget, the Finance (No.2) Bill published on 23 March contains the legislation to give effect to some of these changes. The Bill is currently making its way through parliament.
Assuming no significant changes are made to the Bill, certain individuals with pension commencement lump sum (PCLS) protection will maintain entitlement to a higher PCLS in the 2023/24 tax year.
The position in later tax years is still to be confirmed, with the necessary legislation expected to follow later this year.
The PCLS permitted maximum depends on which one of the following four categories the individual falls into at the time of payment:
1. No PCLS protection
2. Scheme specific lump sum protection
3. Primary protection and lump sum rights on 5 April 2006 exceeding £375,000
4. Enhanced protection and lump sum rights on 5 April 2006 exceeding £375,000
The Bill references individuals in the last of the four categories listed above. For such individuals, their enhanced protection certificate states the percentage of the value of total benefits coming into payment that can be paid as a PCLS. This percentage is their PCLS permitted maximum.
Therefore, if the value of the benefits coming into payment is £3m, and the certificate shows a percentage of 25%, then their PCLS permitted maximum would be 25% of £3m (£750,000). The value placed on the benefits is identified at the time of the benefit crystallisation event.
Under the changes set out in the Bill, from 6 April 2023 the PCLS permitted maximum for individuals in this category is limited to the amount which could have been paid on 5 April 2023, where this is lower than the normal PCLS permitted maximum.
In effect, a cap is being placed on the amount of PCLS available.
Example one
A member, under the age of 75, is to take benefits from their Sipp on 1 September 2023. The combined value of the Sipp at that point is £2.2m. The member has enhanced protection and is entitled to take 25% as a PCLS. The intention is to take the maximum PCLS and designate the remainder for flexi-access drawdown.
The value of the Sipp on 5 April 2023 was £2m.
As a result of the changes outlined in the Bill, the member’s PCLS would be restricted to £500,000 (25% of £2m).
If the Sipp value on 1 September 2023 was £1.9m instead of £2.2m, the maximum PCLS would be £475,000 (25% of £1.9m).
This capping of the PCLS means that, for those affected, any increase in their uncrystallised pension investments post-5 April 2023 will not result in more PCLS entitlement.
The Bill makes no reference to any changes in the calculation of the PCLS permitted maximum under the other three categories.
However, it confirms that, from 6 April 2023, individuals who applied before 15 March 2023 and validly hold enhanced or one of the forms of fixed protection won’t lose their protection through the various protection cessation events.
This will allow them to accrue benefits and to join or transfer to a registered pension scheme. Consequently, more PCLS may be available.
The Bill indicates that where an application for any of these protections occurs on or after 15 March 2023, the PCLS rules will still apply. However, the protection cessation events regime continues to operate. For example, any relevant benefit accrual would result in the protection being lost, which in turn could impact the PCLS available.
Example two
Miriam and Malik are 65-year-old twins with identical pension savings:
- Sipp value on 5 April 2023 is £1.1m
- Fixed protection 2016 (FP16) with 100% lifetime allowance (LTA) available
- Miriam’s FP16 application – 1 May 2018
- Malik’s FP16 application – 31 March 2023
Both contributed £90,000 (gross) to the Sipp on 6 April 2023, taking advantage of increase in annual allowance (AA) and carry forward of unused AA.
The current Sipp value is £1.2m.
Miriam:
PCLS available, assuming Sipp is fully crystallised, is the lower of:
- 25% of £1.2m = £300,000
- 25% of £1.25m = £312,500
Malik:
PCLS available, assuming Sipp is fully crystallised, is the lower of:
- 25% of £1.2m = £300,000
- 25% of £1.0731m* = £268,275
*No LTA protection as FP16 has been lost
The abolition of the LTA is not legislated for within the Bill and will be dealt with in a future Finance Bill and take effect from 6 April 2024. The impact on PCLS from that date will not be known until this legislation is published.
Neil MacGillivray is head of technical support at Nucleus
