Example

On April 5 2006, Gerry had lump sum rights of £50,000 and uncrystallised pension rights of £100,000. Gerry carried on working until 2012, so his employer made contributions to the scheme up until that point. He took benefits on May 10 2019. At this point, his pension rights were valued at £220,000.

Gerry’s lump sum (LS) is calculated like this:

£50,000 x (£1.8m / £1.5m) = £60,000

And his additional lump sum amount (ALSA) is calculated like this:

(£220,000 – (£100,000 x £1.055m / £1.5m)) x 25 per cent = £37,417

Gerry’s total PCLS is therefore:

£60,000 + £37,417 = £97,417

Quirks and exceptions

The above calculation is the standard calculation. If a member holds fixed protection or individual protection, however, the calculation is slightly different, and we use the protected LTA in the second part of the calculation instead of the current standard LTA.

Taking the example above, let’s assume Gerry held fixed protection 2016 and therefore had a protected LTA of £1.25m. The ALSA part of the calculation would look like this:

(£220,000 – (£100,000 x £1.25m / £1.5m)) x 25 per cent = £34,167

As you can see, this reduces the ALSA (and therefore the overall PCLS) by £3,250.

The decrease would be even more pronounced if Gerry held the 2012 or 2014 variations of fixed protection.

In a small number of cases, therefore, it could conceivably be worthwhile for a member to revoke their fixed protection given it could result in higher PCLS.

There are also a couple of quirks around transfers.

Firstly, if a member transfers two protected PCLS entitlements into the same receiving scheme, protection is lost on the second transfer.

The same applies if they transfer a protected PCLS entitlement into a scheme that already has one.

It is still an authorised payment, so there are no tax charges, but it will mean the PCLS from the second transfer is calculated in accordance with protected PCLS calculation from the first transfer.

A member in this situation might be advised to take the benefits separately in the two schemes first and only amalgamate them afterwards.

Secondly, some schemes technically have only one member. The most common of these is a deferred annuity contract (sometimes known as a Section 32 policy).

As there is only one member, there is no-one else to transfer with, meaning the protection is effectively stranded in the transferring scheme.

The same principle would also apply to a one-member small self-administered scheme.

Martin Jones is technical team leader at AJ Bell