RPSM03305020 - Scheme Administrator Pages: Protecting pension rights from tax charges: Benefit payments - primary protection: Benefits less than standard lifetime allowance

Benefits crystallising are not more than the standard lifetime allowance

If the following percentages, when added together, do not exceed 100%, benefits may be paid according to the scheme rules, and there is no lifetime allowance charge on that benefit crystallisation event -

• the value of the current benefit crystallisation event divided by the standard lifetime allowance for the year in which the crystallisation occurs, plus
• the value of each earlier benefit crystallisation events expressed as a percentage of the standard lifetime allowance for the year in which each benefit crystallisation event occurred (these percentages should be provided when benefits crystallise and for pensions annually to each member under the requirements of The Registered Pension Schemes (Provision of Information) Regulations 2006 – SI 2006/567, plus
• the value of pre-commencement pensions expressed as a percentage of the standard lifetime allowance for the year in which the first benefit crystallisation event occurred in respect of the member in question (see RPSM03301010 and RPSM03301020).

Example

Jo has benefits crystallising in 2007/08 (when the standard lifetime allowance is £1.6 million) of a lifetime annuity of £900,000 and a pension commencement lump sum of £300,000. This is her first benefit crystallisation event. She has a pension in payment that started before 6 April 2006 (a pre-commencement pension). The annual rate of this pension in 2007/08 is £15,000. The total percentage of the standard lifetime allowance used up is

Lifetime annuity – £900,000/£1.6 million = 56.25%

Pension commencement lump sum - £300,000/£1.6 million = 18.75%

Pre-commencement pension – (£15,000 x 25)/£1.6 million = 23.43%

So the percentage of the standard lifetime allowance used up at this crystallisation is 98.43%.

Where the benefits crystallising do not exceed 100% of the standard lifetime allowance the member will not be using their primary protection so the scheme administrator will not need to see details of the HMRC certificate.

However if the total lump sum benefits are to exceed £375,000 the individual will be using primary protection so you will need details of their HMRC certificate of primary protection. (Note that the amount of £375,000 includes the deemed amount of lump sum paid from benefit crystallised before 6 April 2006 – see RPSM03302020.

RPSM03305051 give more information on lump sum benefits paid under primary protection.

On payment of benefits you will need to

• provide the member with a P60 (or P60substitute) at the end of the tax year in question (by 31 May following the end of the tax year),
• provide the member with a statement telling them what percentage of the standard lifetime allowance has been used up by the benefit crystallisation event (see RPSM03305070), and
• keep records for at least 6 years following the tax year in which the benefit crystallisation event has taken place in case HMRC decide to carry out an audit at a later date.