RPSM11100090 - Technical Pages: Lifetime allowance: Basic principles: Worked example

Worked example

On 9 October 2006, Judy decides to draw some of her benefits from a registered pension scheme. She wants to take the maximum lump sum and use the residual funds to purchase a lifetime annuity. The scheme administrator calculates the capital crystallised value of the level of benefits she wants to draw as being £750,000.

The scheme administrator writes to Judy telling her how much will crystallise for lifetime allowance purposes and the percentage of the current standard lifetime allowance this will represent (50% of the standard lifetime allowance for the 2006/07 tax year). They ask Judy to provide a statement within 1 month confirming the level of lifetime allowance she anticipates being available on the anticipated BCE date, and to say whether or not she anticipates any other BCE occurring either on or before that date under another scheme. They also ask her whether she is entitled to an enhanced lifetime allowance and, if so, to provide evidence of the certificate confirming the exact level of enhancement, as provided by HMRC.

Judy has not drawn any pension benefits from any other source previously and is subject to the standard lifetime allowance. She provides the requested statement confirming she has not used up any lifetime allowance previously and does not anticipate another BCE occurring either by or on the proposed date of the BCE.

The scheme administrator is satisfied that there is no chargeable amount and pays the benefits in full. They send Judy a statement verifying that she has used up 50% of the standard lifetime allowance at the BCE. Judy keeps this for future reference.

In the 2010/11 tax year Judy decides to draw the rest of her benefits under the scheme. The scheme administrator calculates the capital crystallised value of these remaining benefits as £180,000. The standard lifetime allowance is now £1.8 million so this second tranche of pension benefits represents 10% of the standard lifetime allowance at that time.

The scheme administrator writes to Judy outlining the above and asking her again about her anticipated available lifetime allowance at the time she wants to draw benefits. Judy still has 50% of her lifetime allowance available.

The new tranche of benefits will take Judy up to 60% of her lifetime allowance (50% plus 10%), so again there is no chargeable amount on this BCE. Judy declares to the scheme administrator that she has 50% of the standard lifetime allowance available at that time.

Benefits are paid out by the scheme administrator.

The scheme administrator sends a statement to Judy telling her she has now in aggregate used up 60% of her lifetime allowance (the standardlifetime allowance) through thescheme. Again, this certificate helps Judy keep track of the lifetime allowance she has used up, and evidence this fact where necessary