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Adviser  >  Technical Central  >  Support material  >  Case Studies  >  Pension Commencement Lump Sum

Pension Commencement Lump Sum

In this case study we will compare 2 members of occupational pension schemes who have an entitlement to a pension commencement lump sum (PCLS) of more than 25% of their pre A-Day benefits. One of them doesn't get advice from their financial adviser and the other one does.

Scenario 1 - no financial adviser until it's too late

Jack joined EHR Ltd in 1980 and became a director in 1985. When he became a director Jack, and 3 other directors, set up a small self-administered scheme (SSAS).

Shortly after A-Day Jack was advised that his PCLS entitlement on the day before A-Day was £150,000.

In 2008 Jack decided to set up his own business, and left EHR Ltd. Jack and the other Trustees of the SSAS agreed that it would be best if Jack moved his share of the SSAS to another policy. Jack moved his share of the SSAS to a section 32 buy-out and started up a self-invested personal pension for all his future contributions. Jack does this without speaking to a financial adviser.

In 2014 Jack decides to take his benefits and asks his pension providers for some figures. The figures from the section 32 provider show the following:

Section 32 buy-out Value of policy at vesting = £500,000 Amount that can be taken as PCLS = £125,000 (25%) Amount that can be used to purchase an annuity = £375,000

Jack does not understand why the PCLS that can be taken from the section 32 is less than it was in the SSAS on the day before A-Day, 8 years ago. He makes an appointment to speak to a financial adviser.

The adviser explains that if Jack had left his benefits in the SSAS, and assuming that the benefits value was unchanged, then he would have been entitled to the following:

Jack's share of the SSAS on A-Day = £300,000 Pre A-Day entitlement to PCLS = £150,000 Value of section 32 policy at vesting = £500,000 Pre A-Day PCLS entitlement increased in line with statutory lifetime allowance (SLA) = £150,000 x £2.1 million* = £210,000                     £1.5 million * The SLA figure quoted in this example is an estimate only.

The entitlement to more than 25% PCLS applies if you remain in the same scheme. If, as in Jack's case, you transfer to another policy you may lose this entitlement (but see 'Transfers' later). Under the new policy Jack is only entitled to 25% of the value of the section 32 at vesting, £85,000 less than he may have been able to take had he not transferred the money to the section 32.

If Jack had taken financial advice the situation might have been avoided.

Scenario 2 - discusses with financial adviser

Laura joined her employer's contracted-in money purchase scheme (CIMP) in January 1990. Laura and her employer both pay 5% of salary into the CIMP and on A-Day Laura's financial adviser confirms that her plan is worth £68,000 and her pre A-Day PCLS entitlement is £22,500.

In 2010 Laura decides that after 20 year's service that it is time for a change and she moves to a smaller company and joins their CIMP scheme. Laura thinks that it would be easier if she transfers the money from her original employer's pension scheme into her new employer's scheme so that all the money is in the same place. Before she does anything she speaks to her financial adviser.

The adviser explains the changes that were made to pension schemes on A-Day (6 April 2006). He tells her that under the new rules the maximum amount of PCLS that a member of a registered pension scheme can take is 25% of the value of benefits at vesting (within certain limits). As Laura was a member of a pension scheme before A-Day, it is still possible for her to take more than 25% PCLS on the value of her original pension scheme when she comes to retire, if she leaves the money where it is. If she transfers the money to her new employer's pension scheme then she may lose this entitlement (but see 'Transfers' later). The financial adviser prepares the following for Laura, using estimates of future figures to illustrate what he means:

Value of Laura's CIMP policy on A-Day = £68,000 Pre A-Day entitlement to PCLS = £22,500 Projected value of CIMP in 2015 (scheme retirement date) = £140,000 Pre A-Day PCLS entitlement increased in line with SLA = £22,500 x £2.15 million* = £32,250, plus                   £1.5 million 25% of the increase in the value of the policy since A-Day =  [£140,000 x (£68,000 x £2.15 million*)] x 25% = £10,633                                   £1.5 million Total = £42,883 Projected amount of PCLS if Laura transfers the money to her new employer's pension scheme = £140,000 x 25% = £35,000 Difference = £7,883 *The SLA figure quoted in this example is an estimate only.

Laura doesn't know if she will want to take the maximum amount of PCLS when she wants to take her benefits. She decides to leave the money where it is so that she has the option to take the higher amount of PCLS if she needs it.

These two scenarios show the important role financial advisers will have in ensuring clients are not caught out by the new rules.

Transfers

There are two ways in which entitlement to a PCLS of greater than 25% of the fund can be preserved on transfer (other than through primary or enhanced protection).

Transfers to s.32 contracts on the wind-up of an occupational pension scheme will retain the higher PCLS entitlement. This is only effective if the the ceding scheme was established before A-Day, so a subsequent transfer would lose the entitlement.

Block transfers to any registered pension scheme would also retain the higher entitlement. A block transfer is where more than one member transfers out of a scheme to the same scheme in a single transaction. For this purpose, transfers to personal pension plans (or stakeholder plans) run by the same provider would count as 'the same scheme'. 

Further details can be found in Pension commencement lump sum protection on transfer.



This information is based on our current understanding of the relevant Finance Acts.

This case study is an example only, and whilst it highlights some of the opportunities for planning, it should be recognised that it is not a complete or exhaustive description of the opportunities or pitfalls.This information is based on our current understanding of the Finance Act 2004, Finance Act 2005 and other relevant legislation.

Published 18 April 2008