RPSM11101100 - Technical Pages: Lifetime allowance: Level of lifetime allowance: How a lifetime allowance enhancement factor is applied at a BCE

How a lifetime allowance enhancement factor is applied at a BCE

Where a member becomes entitled to a lifetime allowance enhancement factor their level of lifetime allowance is enhanced at every BCE under any registered pension scheme that occurs in relation to that member from that point on. The extra lifetime allowance they are entitled to at a BCE is obtained by multiplying the standard lifetime allowance that applies at the point of the BCE by the enhancement factor the member is entitled to.

This ensures that the level of enhancement a member is entitled to keeps track with the upward movement of the standard lifetime allowance figure year by year. So the enhancement rules work very much the same way as other aspects of the lifetime allowance rules.

At any BCE, the individual’s lifetime allowance will be the standard lifetime allowance at that time, plus an amount determined by multiplying that same standard lifetime allowance figure by any relevant lifetime allowance enhancement factors the individual is entitled to, as notified to HMRC.

The whole process is represented in the legislation by the following formula

SLA + (SLA x LAEF)

SLA = the standard lifetime allowance at the point of calculation (the BCE).

LAEF = the total of the lifetime allowance enhancement factors applying in the particular circumstance.

The formula operates to give an individual the appropriate enhanced lifetime allowance, at the appropriate amount, according to the date the BCE takes place.

For simplicity, the legislation also allows an individual to calculate their personal lifetime allowance as a percentage in excess of the standard lifetime allowance and to apply this going forward. For example, a member who is entitled to a lifetime allowance enhancement factor of 0.2 has a personal lifetime allowance of 120% of the standard lifetime allowance. Going forward, when there is a BCE, the amount crystallised will be calculated, as usual, by reference to the standard lifetime allowance for the tax year in which the BCE occurs. So, if an individual with a personal lifetime allowance of 120% has their first BCE in the 2007/08 tax year, when the standard lifetime allowance is £1.6 million, and the amount crystallised is £160,000, the amount of lifetime allowance used up is 10% and the individual’s available lifetime allowance going forward is 110% of the standard lifetime allowance.

A further example is given on RPSM11101110.

RPSM11101120 covers the position where an individual is entitled to more than one lifetime allowance enhancement factor.

The example given in RPSM11103530 shows how in practice a scheme administrator may factor in an entitlement to an enhanced lifetime allowance at a BCE.