RPSM11104630 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Member reaches age 75 without taking all benefits: Examples of the amount crystallising through BCE 5

Examples of how the amount crystallising through BCE 5 is calculated

Example 1

Martin is a member an occupational pension scheme that provides defined benefits. The scheme provides him with a scheme pension and a separate lump sum set by reference to his service and final earnings when he retires.

Martin is 75 on 8 October 2006. Martin is entitled under the scheme rules to draw his benefits at that time, but instead he decides to defer payment for a few years.

On Martin’s 75^th birthday the scheme administrator has to carry out a lifetime allowance test (as BCE 5 has occurred). The scheme administrator calculates what benefits Martin would be entitled to if he drew benefits at that date.

Martin had 20 years service with the company and was earning £30,000 per annum at that point. This would entitle him to a scheme pension of £10,000 per annum and a separate lump sum of £20,000.

The amount crystallised is calculated at £220,000, or 14.66% of the standard lifetime allowance for that tax year (£1.5 million for 2006/07).

This is arrived at by multiplying the annual rate of pension that would be paid at that date (£10,000) by a factor of 20 (the standard RVF) to arrive at a capital value of £200,000, and then adding on the £20,000 prospective lump sum payment.

Example 2

As in the above example, but Martin has no separate lump sum entitlement. He would only be able to draw a lump sum under the scheme if he commuted part of his £10,000 pension.

As such the scheme administrator can ignore any prospective lump sum payment. The amount crystallising is only £200,000 (20 x the £10,000 pension) using up 13.33% of his lifetime allowance.