RPSM11104960 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Pension in payment on 6 April 2006: Example 2 of calculating the capital value

Example showing the calculation of the capital value of a pre- commencement pension which uses all the available lifetime allowance

On 6 April 2006 Tracey has £900,000 held in a money purchase arrangement. She is also in receipt of a level scheme pension of £80,000 per annum. As this scheme pension started before 6 April 2006 it is a pre-commencement pension for lifetime allowance purposes.

On 8 November 2006 Tracey crystallises her benefits under the money purchase arrangement. This triggers a BCE. The crystallised value of these benefits is £900,000, which represents 60% of the standard lifetime allowance at that time.

But as this is Tracey’s first BCE after 5 April 2006 the available lifetime allowance is reduced by the crystallised value of the pre-commencement pension (the scheme pension) on 8 November 2006.

The crystallised value of the pre-commencement pension is £2 million (25 x £80,000). This is more than Tracey’s level of available lifetime allowance (£1.5 million). So she has no available lifetime allowance at that first BCE post 5 April 2006.

This means that everything crystallising under the money purchase arrangement will constitute a chargeable amount. The chargeable amount will not be increased because the crystallised value of the pre-commencement pension (£2 million) exceeds Tracey’s actual available lifetime allowance level (£1.5 million).

Tracey cannot be paid a pension commencement lump sum as she has no available lifetime allowance. Tracey decides to take all his benefits as a lifetime allowance excess lump sum as everything crystallising under the arrangement will give rise to a lifetime allowance charge.

The payment of the £900,000 lifetime allowance excess lump sum crystallises the same amount through BCE 6. This £900,000 all represents a chargeable amount. The scheme administrator deducts the £495,000 lifetime allowance charge due from this payment before payment, and accounts for the charge due direct with HMRC.