Pension commencement lump sums (PCLS)

One of the main features of a pension is that you can usually take a tax-free lump sum. In the legislation, this is known as a Pension Commencement Lump Sum (PCLS). As part of our Bitesize Technical series, Senior Technical Consultant, Lisa Webster explains the rules around PCLS.

Watch the bitesize video now or scroll down to read through the key talking points.

Key insights on Pension Commencement Lump Sums

PCLS is a tax-free lump sum you can choose to receive when starting to take a pension, but it must be accompanied by pension funds used to provide taxable income.

In schemes like SIPPs, PCLS is typically taken by designating funds for flexi-access drawdown, with no requirement to make immediate withdrawals.

PCLS can also be taken when purchasing an annuity or when a defined benefit scheme pension starts.

The maximum PCLS is one-third of the amount used to provide the pension income. For example, with a £400,000 SIPP, the maximum PCLS would be £100,000 if £300,000 is designated for drawdown.

PCLS is limited to the member’s lump sum allowance (LSA). Most people have an LSA of £268,275, but it can be higher if they had protections from old lifetime allowances or higher rights at 5 April 2006.

Technically, PCLS must be paid within an 18-month period around the time the pension income starts, but it is usually paid simultaneously with the start of pension income.

PCLS can be taken in stages instead of all at once. For example, from a £1 million pension, £100,000 PCLS can be taken by putting £300,000 into drawdown, leaving £600,000 untouched for future PCLS.

It's possible to take regular payments combining tax-free PCLS and taxable income drawdown.

More Bitesize Technical

Take a bite out of 'Flexi-access drawdown explained', the previous instalment of our pension benefits Bitesize Technical series, or start from the beginning, here.