RPSM11104540 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Lifetime annuity purchase - BCE 4: Amount crystallising when purchase is from unsecured pension fund

Calculating the amount that crystallises through BCE 4 where a lifetime annuity is purchased from the unsecured pension fund

Prevention of overlap

The legislation provides rules to ensure that benefits are not tested through a BCE more than once. This is referred to in the legislation as prevention of overlap.

Where a lifetime annuity is purchased following a period of unsecured pension, i.e. purchased from unsecured pension fund rather than uncrystallised funds, the amount crystallising under BCE 4 is reduced to reflect that all (or part of) the funds being used have effectively already been tested for lifetime allowance purposes. Funds from the unsecured pension fund would have been tested through BCE1, when uncrystallised funds were originally designated into that fund to provide an unsecured pension.

In this circumstance the legislation provides for the reduction of the amount crystallising through BCE 4 by the amount that crystallised at the earlier event (or events) where funds were designated to provide unsecured pension. So the amount crystallising through BCE 4 will be reduced by what previously crystallised though BCE 1 when uncrystallised funds were introduced into the unsecured pension fund.

If the amount crystallising through BCE 4 is reduced to ‘nil’ or a negative amount then no amount has been crystallised and no lifetime allowance has been used up. This will be the case where the unsecured pension fund has not grown in value over time (as the pension drawn from the fund has been greater than any growth of the underlying assets).

A negative result does not mean that the member’s available lifetime allowance is increased.

The two examples on the RPSM11104550 illustrate the above.

Partial annuitisation or multiple designations

Where only part of the unsecured pension fund is used to purchase a lifetime annuity, or the unsecured pension fund concerned was built up by several previous designations of uncrystallised funds, the amount the crystallised value is reduced is calculated on a pro-rata basis.

For example, a lifetime annuity is purchased using half of the funds of an unsecured pension fund that was generated by three designations at different times. For each designation £100,000 was deemed to have crystallised, giving a total deemed crystallisation value of £300,000 for the unsecured pension fund. As only half the fund is used to purchase the lifetime annuity the amount crystallising under BCE 4 is the annuity purchase price - £150,000 (half the crystallised value of the unsecured pension fund)