RPSM11104550 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Lifetime annuity purchase - BCE 4: Examples of the amount crystallising when annuity purchase is from a drawdown pension fund

Examples of how the amount crystallising through BCE 4 is calculated where a lifetime annuity is purchased from the drawdown pension fund (before 6 April 2011 unsecured pension fund)

Example 1

Andy is aged 55 and has benefits worth £200,000 held in a money purchase arrangement. On 5 August 2006 Andy draws all his benefits, taking a pension commencement lump sum of £50,000 and using the remaining funds to provide an unsecured pension.

Two BCEs have occurred - BCE 1 for the designation of funds for an unsecured pension and BCE 6 for the provision of the pension commencement lump sum. A lifetime allowance test is triggered.

The amount crystallised through BCE 1 is £150,000 (i.e. what becomes unsecured pension fund at that point). The amount crystallising through BCE 6 is £50,000. The scheme administrator calculates that the benefits taken represent 13.33% of the standard lifetime allowance (£1.5 million for that tax year).

On 5 August 2011, Andy decides to use all the drawdown pension fund to purchase a lifetime annuity contract. Andy has drawn very little drawdown pension and so his drawdown pension fund has grown to £180,000 at that time.

A lifetime allowance test is triggered through BCE 4 when the annuity contract is purchased. The amount crystallised is reduced by £150,000 to reflect the amount that crystallised previously through BCE 1 when the funds were originally designated to provide unsecured pension.

The amount crystallised is therefore only £30,000 (£180,000 - £150,000).

Example 2

As above, but the drawdown pension fund used to buy the lifetime annuity stands at £120,000 (as Andy has been drawing a higher level of unsecured pension).

BCE 4 is triggered, but nothing crystallises at that point (so Andy uses up no lifetime allowance). This is because the £120,000 notional amount crystallising through BCE 4 is reduced by the £150,000 that crystallised through BCE 1 in August 2006, on the creation of the unsecured pension fund that has been used to purchase the lifetime annuity. So the £120,000 annuity purchase price is cancelled out.