RPSM11105050 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Overview: Lifetime allowance excess lump sum

Payment of a lifetime allowance excess lump sum

Where a member’s lifetime allowance has been fully used up, any benefit entitlement crystallising beyond that point may, if the scheme permits, and the member is under age 75, be paid entirely as a lump sum payment, rather than, as normal, a mixture of pension and lump sum benefits. So any pension entitlement or uncrystallised funds crystallising beyond this point may be commuted and paid entirely as a lump sum.

Where the member’s available lifetime allowance has been fully used up and excess funds or rights are commuted in this way, the resulting lump sum payment is called a lifetime allowance excess lump sum (see RPSM09105200).

A higher tax charge is imposed on any benefits crystallising as a lump sum once the lifetime allowance has been exhausted (55%, compared to 25% where the chargeable amount is being retained in the scheme). This higher rate is designed to cancel out any reliefs obtained in the accrual of those pension benefits which are now paid as a lump sum, to compensate for the loss of tax on what would otherwise have been the provision of a future pension benefit.

Where, following liaison with the member before a BCE, a potential chargeable amount is identified, the scheme administrator will calculate the level of pension/lump sum entitlement that will take the member up to their lifetime allowance ceiling, without creating a chargeable amount. The scheme administrator may then give the member the option of commuting the excess pension entitlement remaining to a lump sum payment (a lifetime allowance excess lump sum). The lifetime allowance excess lump sum paid will then crystallise through BCE 6, giving rise to a chargeable amount.

Transfer to a qualifying recognised overseas pension scheme

Where a transfer is going to be made to a qualifying recognised overseas pension scheme if the member has reached the normal minimum pension age any part of that transfer payment that would, if paid, generate a chargeable amount may be paid as a lifetime allowance excess lump sum. So the amount representing the member’s available lifetime allowance will be transferred overseas and will crystallise through BCE 8. The rest of the intended transfer payment may be paid to the individual as a lifetime allowance excess lump sum and will crystallise through BCE 6.

If the member has not reached the normal minimum pension age, a lifetime allowance excess lump sum may not be paid. The full amount transferred will then crystallise through BCE 8.

Order of BCEs where a chargeable amount is going to arise

Where the member exceeds their lifetime allowance when crystallising benefits under a registered pension scheme, the payment of any lifetime allowance excess lump sum must always be treated for lifetime allowance purposes as having occurred after all other BCEs occurring at the same time. This is because the member must have used up all their lifetime allowance before such a lump sum can be paid (so the amount crystallising through BCE 6 relating to that payment will be the last BCE). The example on RPSM11105070 explains this.