RPSM11104650 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Member reaches age 75 before 6 April 2011 without taking all benefits: Benefits from a hybrid arrangement

Note: This page has no application where a member reaches age 75 on or after 6 April 2011. For the position on or after 6 April 2011 see RPSM11104655.

BCE 5 and BCE 1: where a member reaches age 75 before 6 April 2011 without taking their entitlement under a hybrid arrangement

A hybrid arrangement may potentially provide benefits on either a defined benefits or money purchase/cash balance basis. When benefits actually come into payment the hybrid arrangement is then treated on the basis of whatever form benefits finally take.

Therefore the legislation makes specific provision to ensure that uncrystallised benefits held under a hybrid arrangement are tested for lifetime allowance purposes, and appropriately valued, when the member reaches their 75th birthday, as is the case under a standard money purchase arrangement or defined benefits arrangement.

The legislation does this by testing the level of benefits that would potentially come into payment under the arrangement if those uncrystallised benefits were taken at that point.

As these benefits could be provided in one of two ways the legislation needs to actually test the level of benefits that would come into payment under the arrangement if each benefit option under the arrangement were exercised. The higher of the two crystallised values is then taken as the amount that crystallises at age 75 under the arrangement.

Where the hybrid arrangement provides no defined benefits element, providing benefits either on a cash balance or other money purchase basis, there is no problem. Here the hybrid arrangement will also meet the definition of a money purchase arrangement, so any uncrystallised funds remaining immediately before they reach age 75 would automatically be designated to unsecured pension fund, and tested through BCE 1 (see RPSM11104090 and RPSM11104100).

Where the hybrid arrangement provides defined benefits the scheme administrator needs to carry out two calculations

1. A calculation assuming the arrangement will provide benefits wholly on a money purchase basis, with all uncrystallised funds designated to provide unsecured pension just before midnight (23:59 hrs) the day before their birthday. This would test and value the assumed benefit designation through BCE 1.
2. A calculation assuming that benefits will be provided under the arrangement as a defined benefit (valuing the undrawn benefits in the same way as through BCE 5 - see RPSM11104620.

It is the higher of the two values that is the amount that crystallises at age 75 under the arrangement.

RPSM11104660 gives an example.