RPSM11104270 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Scheme pension - BCE 2: Prevention of overlap in a money purchase arrangement

Provision of a scheme pension following payment of drawdown pension (before 6 April 2011 unsecured pension)

[Para 3,Sch 32]

The legislation provides rules to ensure that funds held in a registered pension scheme are not caught more than once for lifetime allowance purposes (so are not caught by one BCE then by another at a later date).

A money purchase scheme may give their members the option of taking a scheme pension following a period of drawdown pension (before 6 April 2011 unsecured pension), drawn direct from the scheme. A member designates funds to provide a drawdown pension (before 6 April 2011 an unsecured pension), with the drawdown pension fund (before 6 April 2011 unsecured pension fund) generated being tested for lifetime allowance purposes through BCE 1. Then at a later date funds from that drawdown pension fund (before 6 April 2011 unsecured pension fund) are applied to provide a scheme pension, either directly from the scheme or through the involvement of an insurance company.

Here, the provision of a scheme pension before the member reaches age 75 still triggers a lifetime allowance test through BCE 2. However, the legislation provides that the amount crystallising through BCE 2 is reduced to take account of any funds being applied to provide the scheme pension that have previously been designated for the provision of drawdown pension (before 6 April 2011 unsecured pension) to the member. The legislation does this by reducing the amount crystallising under BCE 2 by the amount that previously crystallised under BCE 1, at the earlier BCE (or BCEs) when uncrystallised funds were designated to provide a drawdown pension (before 6 April 2011 an unsecured pension).

The same principle applies where, before the member reaches age 75, a lifetime annuity is purchased from a drawdown pension fund (before 6 April 2011 an unsecured pension fund) (see RPSM11104540).

If the amount crystallising through BCE 2 is reduced to nil or a negative amount then no amount has been crystallised and no lifetime allowance has been used up. A negative result does not mean that the member’s available lifetime allowance is increased.

The above is explained via example 1 on RPSM11104280.

Where the scheme pension is provided or the lifetime annuity is purchased after the member has reached age 75 there is no BCE 2 as the only BCE that can occur after age 75 is a BCE 3 (see RPSM11102070)

Where only part of the drawdown pension fund (before 6 April 2011 unsecured pension fund) is used to provide a scheme pension, or there have been multiple designations

If only part of the drawdown pension fund (before 6 April 2011 unsecured pension fund) was used to provide a scheme pension then the above process would work on a pro-rata basis. See example 2 on RPSM11104280.

If the drawdown pension fund (before 6 April 2011 unsecured pension fund) the scheme pension is funded from has been generated from multiple designations (through an initial designation of uncrystallised funds followed by later additional fund designations) the position is still the same. You would pro rata by reference to all the previous amounts that crystallised through BCE 1 related to that unsecured pension fund.

For example, if the drawdown pension fund (before 6 April 2011 unsecured pension fund) was generated by three designations at different times, and at each event £100,000 was deemed to have crystallised, then the pro-rata will be based on £300,000. So if half the resulting drawdown pension fund (before 6 April 2011 unsecured pension fund) is used to fund a scheme pension then the amount crystallising would be reduced by £150,000, if a third was used then £100,000 etc.


  Glossary (RPSM20000000)