RPSM11102010 - Technical Pages: Lifetime allowance: When you test for the lifetime allowance: Benefit crystallisation event (BCE)

A benefit crystallisation event (BCE)

The legislation specifies the various occasions when an individual will use up part of their lifetime allowance, and provides a means for calculating how much of that allowance is used up at that time. These occasions are referred to as benefit crystallisation events (BCEs).

A BCE happens when the pension rights that have been built up by an individual in a registered pension scheme are realised, most commonly through the start of a pension benefit or where a lump sum benefit is paid.

There are tenBCEs (BCEs 1-9 and 5A), each triggering a lifetime allowance test, and these are listed in RPSM11102020.

The tenBCEs apply to specific benefit entitlements under any registered pension scheme (referred to in the lifetime allowance legislation as ‘relevant pension schemes’).

These BCEs only catch entitlements provided under a registered pension scheme that conform to the authorised member payment rules. RPSM11102100 explains why an unauthorised member payment is not caught through any of the tenBCEs and so does not use up any lifetime allowance.

BCEs 1-6relate to the payment (or deemed payment) of benefits to a member of a registered pension scheme, either as a lump sum payment or as an actual pension entitlement. BCE 7relates to the payment of certain lump sum benefits on the death of the member. BCE 8relates to the transfer of a member’s benefits to a qualifying recognised overseas pension scheme. BCE 9 relates to certain authorised member payments that are prescribed in regulations.

The legislation distinguishes between different benefit payments through different BCEs because each needs to be valued in a different way in order to obtain an appropriate measure of its capital value.

At such an event the scheme administrator must establish the capital value of the member’s pension savings arising from the BCE. This is referred to in the legislation as the amount that crystallises at that event (hence the term benefit crystallisation event). This value is then compared to the individual’s lifetime allowance that is still available at the time of the BCE (if any). If the amount crystallising exceeds the level of lifetime allowance available, then the excess represents a chargeable amount.

RPSM11103000 onwards deal with the processes involved before, at and after a BCE.

The amount crystallising at these BCEs depends on the nature of the event concerned, i.e. the type of arrangement and the form of the benefits crystallising. Where a lifetime annuity contract is purchased, the crystallised value is the purchase price of that annuity. And where a lump sum is paid, it is simply the amount of lump sum paid. But where a scheme pension is being paid a conversion factor (usually 20) needs to be applied to the pension coming into payment in order to arrive at a capital, crystallised value. Future increases of that pension once in payment beyond an accepted measure also trigger a BCE. An exception to the normal rule whereby a scheme pension is valued using a conversion factor is where BCE 9 is prescribed in regulations to apply where arrears of pension are paid after a member’s death. This is where entitlement to those pension instalments for the purpose of the tax rules could not be established before death. In such as case the crystallised amount is the amount of the lump sum that represents the arrears of pension.

RPSM11104000 onwards explain how the crystallised value is calculated at each of the tendifferent BCEs.