Protected tax free cash above 25%

Some people can take more than 25% of a pension as tax free cash because, on 5 April 2006, their scheme already gave them a right to a bigger lump sum. Scheme specific lump sum protection, in paragraphs 31 to 34 of Schedule 36 to the Finance Act 2004, preserves that right automatically for that scheme only. Since April 2024 the protected lump sum is capped by the lump sum and death benefit allowance rather than the lump sum allowance, and only a quarter of the value crystallised uses up the lump sum allowance.

What is scheme specific lump sum protection?

A pension commencement lump sum is normally limited to 25% of the value of the rights coming into payment. Before 6 April 2006 some members had a right under their scheme to a tax free lump sum worth more than a quarter of their rights. HMRC’s Pensions Tax Manual at PTM063130 explains that scheme specific lump sum protection allows those members to receive a pension commencement lump sum above 25% from that scheme.

No application to HMRC is needed and nothing is registered; the legislation applies the protection automatically. HMRC also points out that the scheme is not obliged to pay the maximum. As the name suggests, the protection attaches to one specific scheme, which is why transfers can destroy it. It is separate from the lump sum protection attached to primary or enhanced protection, covered on lifetime allowance protections, and from a protected pension age.

Who qualifies?

PTM063130 lists three eligibility conditions:

1. on 5 April 2006 you were a member of a retirement benefits scheme or deferred annuity contract within paragraph 1(1)(a) to (e) of Schedule 36, which includes section 32 policies;
2. the value of your uncrystallised lump sum rights under that scheme on that date was more than 25% of the value of your total uncrystallised rights under it; and
3. you did not give notice of reliance on primary or enhanced protection, or if you did, your total lump sum rights were not more than £375,000.

The lump sum rights that count are only those that could have been paid within the HMRC limits in force before 6 April 2006. PTM063140 says that additional voluntary contributions started after 7 April 1987 and contracted out protected rights could not be commuted, so they are left out, and where a scheme promised a lump sum up to HMRC limits but the fund was too small, the lower figure the fund could actually provide is used.

How is the protected amount worked out?

Paragraph 34(3) of Schedule 36 replaces the normal “permitted maximum” for the lump sum with a formula: A × 1.2 + B.

• A is the value of your uncrystallised lump sum rights in the scheme on 5 April 2006, valued under paragraph 32.
• B is an additional amount for growth since then: (C + D − E × F ÷ 1,500,000) ÷ 4, where C is the lump sum paid, D is the value of the pension being set up with it, E is the value of your total uncrystallised rights in the scheme on 5 April 2006 and F is £1,073,100, or your own lump sum and death benefit allowance if you hold fixed or individual protection. If B comes out negative it is nil.

In effect, the 2006 lump sum is uplifted by a fifth, and you also get a quarter of the growth in your rights above a scaled down version of the 2006 value. Paragraph 34(4) adds a floor: if the formula gives less than the ordinary 25% figure, the ordinary rule applies instead.

What conditions apply when you take the lump sum?

Paragraph 31(3) requires you to become entitled to all the pensions payable to you under the scheme, other than any already in payment on 5 April 2006, on the same date, and to receive only one pension commencement lump sum in connection with them. Where the lump sum is paid alongside more than one type of pension from the scheme, such as a scheme pension and a lifetime annuity, PTM063130 says all must start within 6 months of the first. The normal age rules still apply, so the lump sum cannot usually be paid before normal minimum pension age.

The lump sum must still be paid in connection with a pension, so a 100% pension commencement lump sum is not possible. If what remains after the protected lump sum is £10,000 or less, it can be paid as a special trivial commutation lump sum within a month, taxed in full as pension income. A member whose 2006 rights could all have been taken as tax free cash may instead qualify for a stand alone lump sum, which has its own conditions.

How does it interact with the lump sum allowance?

Since 6 April 2024 tax free lump sums have been limited by the lump sum allowance, £268,275 as standard, and the lump sum and death benefit allowance, £1,073,100 as standard, for 2026 to 2027. Protected lump sums are treated differently in three ways:

• No lump sum allowance needed. Paragraph 34(2) removes the condition that some lump sum allowance must be available before a pension commencement lump sum can be paid.
• Tax free up to the lump sum and death benefit allowance. Under paragraph 34A, the lump sum is tax free up to your available lump sum and death benefit allowance, and any excess is taxed as pension income at your marginal rate. PTM063130 confirms this.
• Only a quarter counts against the lump sum allowance. Paragraph 34A modifies section 637Q of the Income Tax (Earnings and Pensions) Act 2003 so the amount deducted from your lump sum allowance is the lower of the tax free part of the lump sum and (C + D) ÷ 4.

So a protected lump sum above 25% does not eat into the lump sum allowance any faster than an ordinary 25% lump sum would. That leaves more allowance for tax free cash from other schemes. The general rules are on the lump sum allowance.

What happens if you transfer?

PTM063150 says the protection is lost on a transfer unless it is a block transfer. A block transfer moves, in a single transaction, all the sums and assets for you and at least one other member to a single receiving scheme, and you must not have been a member of the receiving scheme for more than 12 months before the transfer. Retirement annuity contracts, section 32 policies and one member occupational schemes cannot normally make a block transfer, so an individual transfer to a new personal pension usually ends the protection.

A partial transfer out of a protected scheme keeps protection on what stays, but cuts the protected lump sum by a quarter of the transfer value, using (A × 1.2) + B − TV ÷ 4. Anyone being advised to consolidate old pensions should ask whether a scheme carries protected tax free cash before moving it.

A worked example

Illustration only. On 5 April 2006 Helen’s occupational money purchase scheme valued her lump sum rights at £60,000 and her total rights at £150,000, a lump sum percentage of 40%. She has never transferred. In 2026 to 2027 she crystallises the whole £400,000 fund, taking a lump sum and putting the rest into drawdown, and has no protections.

1. A × 1.2 = £60,000 × 1.2 = £72,000.
2. E × F ÷ 1,500,000 = £150,000 × £1,073,100 ÷ £1,500,000 = £107,310.
3. B = (£400,000 − £107,310) ÷ 4 = £73,172.50.
4. Protected maximum = £72,000 + £73,172.50 = £145,172.50, against £100,000 under the normal 25% rule.
5. The lump sum is within her lump sum and death benefit allowance, so it is all tax free.
6. Her lump sum allowance is reduced by the lower of £145,172.50 and £400,000 ÷ 4, which is £100,000, leaving £168,275 for other schemes.

What mistakes come up most often?

• Transferring or consolidating without checking for protected tax free cash first.
• Assuming the protection applies across all pensions. It attaches to one scheme and its block transfer successors.
• Taking benefits in stages. Paragraph 31(3) requires all pensions under the scheme to start on the same date.
• Assuming a provider’s quote already reflects the protection. Ask the administrator to confirm the 5 April 2006 values it holds.
• Assuming the lump sum allowance is used up by the whole protected lump sum. Only the 25% equivalent counts against it.

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Related Accountapedia entries

• The lump sum and death benefit allowance
• Uncrystallised funds pension lump sums (UFPLS)
• Serious ill health lump sums
• Taking tax free cash while still working
• Small pension pots lump sums
• Pension recycling of tax free cash

Sources

• GOV.UK: Manual page PTM063130
• legislation.gov.uk: Act 2004 c. 12, schedule 36
• legislation.gov.uk: Act 2004 c. 12, schedule 36
• legislation.gov.uk: Act 2004 c. 12, schedule 36
• GOV.UK: Manual page PTM063140
• GOV.UK: Manual page PTM063150
• GOV.UK: Pension schemes rates
• GOV.UK: Find out the rules around individual lump sum allowances
• GOV.UK: Manual page PTM062100

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.