RPSM11104645 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Member reaches age 75 on or after 6 April 2011 without taking all benefits or having designated as available for drawdown pension or where designation has earlier been made: Benefits from a money purchase arrangement

Note: This page only applies where a member reaches age 75 on or after 6 April 2011. For the position before 6 April 2011 see RPSM11104640.

Why a money purchase arrangement is not covered by BCE 5, and where a member reaches age 75 on or after 6 April 2011 having previously designated funds as available to provide an unsecured pension (BCE 5A) and where all or part of the funds in the arrangement have not been crystallised (BCE 5B)

There is no need to catch money purchase arrangements through BCE 5. Following the repeal of paragraph 8(2) of Schedule 28 to Finance Act 2004, under a money purchase arrangement any uncrystallised funds held at age 75 are no longer deemed to be designated into drawdown pension fund at that time. A lifetime allowance test is therefore no longer triggered at that point through BCE 1. Instead, any uncrystallised funds are tested against the lifetime allowance at age 75 through BCE 5B

BCE 5A: Where a member reaches age 75 having previously designated funds as available to provide drawdown (before 6 April 2011 unsecured) pension

It may happen that a member has earlier designated funds as available to provide a drawdown pension (before 6 April 2011 unsecured pension) and reaches age 75 without either having taken a lifetime annuity (in which case BCE 4 would have occurred) or a scheme pension (in which case BCE 2 would have occurred). Or such a lifetime annuity or scheme pension has been taken, but only by application of part of the drawdown (before 6 April 2011 unsecured) pension fund. So part of the drawdown pension fund is still in place when the member reaches age 75.

BCE 5A applies such that the amount crystallised on the member reaching age 75 will be -

• the amount of the sums or assets representing the drawdown pension fund of the member
• less the amount (or the appropriate amount) of the amounts originally crystallised under BCE 1 when the member designated funds as available for unsecured (from 6 April 2011 drawdown) pension.

Taking the examples for Andy in RPSM11104550. If Andy did not purchase a lifetime annuity, so BCE 4 did not occur, but instead reaches age 75 at that point, then the amounts crystallised will be the same as described in those examples.

It can be seen therefore that BCE 5A merely performs the same function of a further lifetime allowance test as occurs when a lifetime annuity or a scheme pension arises from a drawdown pension fund. And the prevention of overlap rules apply to ensure that it is only net growth (investment growth less payments of income made) in the drawdown pension fund remaining since the original designation(s) that is tested.

The amount to be reduced under BCE1 for the purpose of BCE 5A is the amount originally designated as available for drawdown (before 6 April 2011 unsecured) pension but which has not since been applied as a lifetime annuity or scheme pension. So, for example, if the original amount designated was £100,000, and £75,000 had been applied towards a lifetime annuity, then £25,000 is to be deducted for the purpose of BCE 5A (see also RPSM11104540).

BCE 5B : Where a member reaches age 75 without having designated any or only some of the funds in a money purchase arrangement as available to provide drawdown pension

BCE 5B occurs where a member reaches age 75 and has remaining unused funds in the arrangement. The amount of the remaining unused funds when the member reaches age 75 is the amount crystallising for the purposes of BCE 5B.

What constitutes remaining unused funds depends on whether or not the arrangement is a cash balance arrangement.

For an other money purchase arrangement remaining unused funds means the amount of sums and assets held for the purposes of the arrangement which have not been designated by the member as available for the payment of drawdown pension and which have not been used to provide a scheme pension or a dependants’ scheme pension.

Where dealing with a cash balance arrangement, the actual level of the uncrystallised funds counting as remaining unused funds physically held in that arrangement at age 75 will not necessarily reflect the true value of the undrawn rights the member is entitled to under the arrangement at that time.

As such, the legislation prescribes a specific method as to how the level of uncrystallised funds held in a cash balance arrangement immediately before the member reaches age 75 should be calculated, and hence the amount that crystallises through BCE 5B as remaining unused funds. The legislation does this in the same way as accrual under a cash balance arrangement is valued for annual allowance purposes (see RPSM06101000 onwards).

The value of the remaining unused funds is taken as being the amount that would be made available to provide the member with benefits at that time if the member became entitled to benefits under the arrangement on reaching age 75. So it is not the funds actually held in the cash balance arrangement at that time, but what funds would be there if the member decided to draw benefits on that date (ignoring any potential reduction that may be applied by the scheme, based on the member’s age).

RPSM11104140 gives an example.

Where the entitlement to the drawdown pension arose before 6 April 2006

[Articles 29 and 29A The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572]

There will be no BCE 4, BCE 2 or BCE 5A in respect of so much of a lifetime annuity or scheme pension that is purchased from a drawdown (before 6 April 2011 unsecured) pension fund that represents unsecured pension in payment on 5 April 2006 (see RPSM09102110).