LTA and the PCLS – What are your options?
Pension rules allow you to take a certain amount of the value of your pension as a tax free payment. This is technically known as the Pension Commencement Lump Sum (PCLS), more generally known as Tax Free Cash.
HMRC put some limits on the amount of tax free lump sum you can take, this has for a long time been capped at 25% of the current Lifetime Allowance, or 25% of your Personal Lifetime Allowance if higher
Although there is currently no limit nor tax charge for the Lifetime Allowance, this is not the case for the amount of tax free cash that can be taken. This has remained capped at 25% of the previous Standard Lifetime Allowance of £1,073,100 therefore, the Standard Pension Commencement Lump Sum (PCLS) is 25% of this, meaning you can access a maximum of £268,275 tax free from your pension.
With a Defined Benefit (DB) scheme such as; The NHS, MyCSP, LGPS or USS to work out what your lump sum is, or could you need to know or calculate how much pension you have, or will have at retirement and then giving up some of this known as commutation, as explained in the following section, to create a lump sum. In some cases (e.g. the 1995 Section) this has already been built in.
With a Defined Contribution (DC) scheme for example; a Personal Pension (PPP), Additional Voluntary Contribution (AVC), or free standing AVC (FSAVC), where there will be a physical ‘pot’ of money, from which you can normally take up to 25% of this cash tax free.
If you have both DB and DC schemes, you need to calculate the total combined amount and make your decision whether to take no, some, or the maximum lump sums from either, or all of your available pensions.
There are options you need to consider regarding how much lump sum to take:
- Take the Standard Lump Sum
- Take the Maximum Tax Free Lump Sum
- Take the Maximum Lump Sum – which may incur tax
- Do not take a lump sum at all
- not a choice available with the 1995 Section of the NHS Pension
There may be considerations as to the order in which you take the Lump Sums that could be tax efficient for you. Please contact us to clarify your options.