If a member has used up all of their LSA or all of their LSDBA and they are still entitled to further pension benefit, the benefit may be commuted and paid as a lump sum. This payment is now known as the Pension Commencement Excess Lump Sum (PCELS). Before the abolition of the lifetime allowance, the equivalent benefit was a 'lifetime allowance excess lump sum'. If a scheme's rules allowed the payment of a lifetime allowance excess lump sum, they can be read as allowing the payment of a PCELS.
The legislation allows for this lump sum payment but pension schemes are not obliged to offer this feature within their scheme rules. It does not limit the payment of the PCELS to particular arrangements but the payment cannot otherwise be an 'excluded lump sum' payment as defined in the legislation.
What is an excluded lump sum
A lump sum is an excluded lump sum if it would be permitted under the 'lump sum rule' in section 166 of the Finance Act 2004. The lump sum rule includes, for example, uncrystallised funds pension lump sums (UFPLS) and serious ill-health lump sums. A scheme cannot pay a PCELS if it would be possible for them to make one of the payments allowed for under the lump sum rule. Note that this applies even if the rules of the scheme in question do not allow such a payment.
In practice, this requirement is most likely to affect defined contribution schemes which do not offer UFPLS payments. Because the legislation allows defined contribution schemes to make an UFPLS payment, such a scheme will be prevented from paying a PCELS even if their governing rules do not allow for the payment of an UFPLS.
Conditions for a PCELS
For those arrangements that can offer the PCELS, the following conditions must first be met:
· A PCELS can only be paid if the LSA or LSDBA has been fully used up.
· the member becomes entitled to it in connection with becoming entitled to a relevant pension
· it is paid within the period beginning six months before, and ending 12 months after, the day on which the member becomes entitled to it
· it does not reduce the rate of payment of any pension to which the member has become (actually) entitled, or extinguish the member's entitlement to payment of any such pension
· it is paid when the member has reached normal minimum pension age or the ill-health condition is met
· it is not an excluded lump sum
In practice we expect only occupational schemes to offer this option when paying benefits which exceed the LSA or LSDBA.
All payments of PCELS will be taxed at the recipient's marginal rate.