Tax-free lump sums whilst alive

There are certain lump sums that you can take whilst alive that may produce a tax-free element. These are:

• Pension commencement lump sum (PCLS)
• Uncrystallised funds pension lump sum (UFPLS)
• Stand-alone lump sums
• Deemed lump sum connected to a Pre A-day pension
• Serious ill health lump sum (SIHLS)
• Trivial commutation lump sum
• Winding up lump sum and small pots

The amount that is tax-free is subject to a permitted maximum, which is defined separately for each type of lump sum.  For some lump sums, the tax-free element will use up the Individual's Lump Sum Allowance (ILSA) and or Individual's Lump Sum and Death Benefit Allowance (ILSDBA) therefore reducing the available allowance until there is none left.

1. Pension commencement lump sum (PCLS)

The whole of the PCLS is tax-free as long as it is within the permitted maximum. Any amount of PCLS that exceeds the permitted maximum is taxable. The tax-free element will use up both ILSA and ILSDBA.

The permitted maximum for a PCLS is:

2. Uncrystallised funds pension lump sum (UFPLS)

The tax-free portion of an UFPLS is 25% of the lump sum as long as the 25% is within the permitted maximum. The remaining 75% as well as any amount of the 25% that exceeds the permitted maximum is taxable as income. The tax-free element will use up both ILSA and ILSDBA.

The permitted maximum is the lower of:

3. Stand-alone lump sums (SALS)

A stand-alone lump sum is very rare but there are 3 scenarios of when there could be a stand-alone lump sum

1. When someone has scheme specific protected tax free cash (SSPTFC)  that is 100%
2. When someone has Primary protection with Protected tax free cash (PTFC) and the PTFC amount is equal to or greater than the uncrystallised fund value
3. When someone has Enhanced protection with protected tax-free cash (PTFC) of 100%

Prior to 15/3/2023 the entire amount was tax-free. However now the tax-free cash (TFC) amount is limited to the permitted maximum

4. Deemed lump sum connected to a Pre A-day pension

If a member has a Pre A-day pension and did not crystallised between 6/4/06 and 5/4/24 there will be a deemed relevant crystallisation event immediately before the first crystallisation. The amount of ILSA and ILSDBA deemed to have been used is 25% of the Pre A-day rights ( 25 x pension or 25 x 80% x max capped drawdown) on the date of the first crystallisation.

5. Serious ill health lump sum (SIHLS)

The whole of a SIHLS is tax-free if the member is under 75 and it does not exceed the permitted maximum. Any amount of SIHLS that exceeds the permitted maximum is taxable as income. The tax-free element will use up ILSDBA.

The permitted maximum for a SIHLS is the remaining ILSDBA unless the client has Enhanced Protection.

Where the client has Enhanced protection, the permitted maximum is the maximum SIHLS that could have been paid on 5/4/24.

6. Trivial commutation, winding up lump sum and small pots

The tax-free element of a trivial commutation lump sum, winding up lump sum or small pot payment will not use up ILSA or ILSDBA. However, in order to take a trivial commutation lump sum or winding up lump sum, you must have some of each allowance available. It does not need to be enough to cover the lump sum, so could be as little as £1. There is no requirement for availability of either allowance for a small pot.

7. Previous crystallisations

Some clients will have taken benefits in the past that were tested against the lifetime allowance. The amount crystallised by these events will reduce clients available ILSA and ILSDBA.

Details of the transitional regime that deals with crystallisations prior to 6/4/24 can be found here.