RPSM11104620 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Member reaches age 75 without taking all benefits: The amount crystallising through BCE 5
Calculating the amount crystallising through BCE 5
|[s216(1), BCE 5][Paras 6 and 14 Sch 32][Para 43(8), Sch 10, FA 2005]|
The amount crystallising for lifetime allowance purposes under BCE 5 is calculated by reference to the level of benefits the member would become entitled to on their 75th birthday if benefits were paid under the defined benefits arrangement at that point.
BCE 5 only covers defined benefits arrangements and a prospective entitlement to a scheme pension and (in some cases) a separate, stand-alone entitlement to a lump sum benefit. Lump sums provided by commutation, giving up pension benefits, are not caught by BCE 5.
The crystallised value of the potential scheme pension entitlement payable is calculated by multiplying the annual level of pension the member would become entitled to on their birthday by a conversion factor. This is done by using the standard relevant valuation factor (RVF) of 20, or another higher non standard RVF where agreed with HMRC (see RPSM11104220).
The value of the prospective lump sum payment is simply the amount of the lump sum that would be paid on that date.
If the member only has the option of drawing a lump sum at the expense of part of their pension benefit, i.e. by commutation, the lump sum element can be ignored. In the legislation all the above is represented by the formula
(RVF x DP) + DSLS
RVF = 20, unless a non-standard RVF has been agreed with HMRC.
DP = the annual rate of scheme pension which the member would be entitled to if, on the date on which they reach 75, the member acquired an actual right to receive it. This is what scheme pension would be payable to the member assuming entitlement arose on reaching 75.
DSLS = the amount of any lump sum (not provided by commutation of pension) which the member would be entitled to if, on that date, they acquired an actual right to receive it. This is what lump sum would be payable to the member if a lump sum was drawn on reaching 75.
The two examples on RPSM11104630 illustrate this.
Reduction of scheme pension entitlement to cover lifetime allowance charge liability
|[Para 14(1A) Sch 32][Para 43(7), Sch 10, FA 2005]|
If the member does not have sufficient available lifetime allowance to cover the amount crystallising through BCE 5 the scheme administrator may reduce the individual’s prospective pension entitlement under the scheme/arrangement in order to cover the lifetime allowance charge due on the chargeable amount arising at that BCE.
This potential reduction is ignored when calculating DP. So DP will be based on the full prospective entitlement under the scheme before any reduction.
Where either the pension entitlement from the scheme is not reduced, or the reduction does not reasonably reflect the tax charge paid by the scheme administrator, based on normal actuarial practice, the tax charge paid by the scheme administrator is added on to the chargeable amount arising. It becomes what is called a scheme-funded tax payment. RPSM11105220 explains this in more detail.