RPSM11105070 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Overview: Example of the calculation of the chargeable amount

An example showing the calculation of the chargeable amount

John is a member of a defined benefits arrangement. He decides to take his benefits in the 2006/07 tax year. John has already used up 90% of his lifetime allowance and is subject to the standard lifetime allowance

John is entitled to a scheme pension of £11,250 per annum and a lump sum of £75,000.

Before paying out the benefits, the scheme administrator calculates the amount that would crystallise for lifetime allowance purposes if those entitlements were drawn. This comes to £300,000 - the scheme pension would crystallise £225,000 through BCE 2 (£11,250 x a relevant valuation factor of 20 added to the £75,000 that would potentially crystallise through BCE 6 on the payment of the lump sum benefit. So the amount crystallising would be 20% of the standard lifetime allowance (£1.5 million for the 2006/07 tax year).

Once the scheme administrator has written to John telling him the above and has received back details of John’s available lifetime allowance, the scheme administrator establishes that only the first £150,000 crystallising will be covered by the available lifetime allowance (10% of £1.5 million, the standard lifetime allowance for the 2006/07 tax year). The remaining £150,000 would fall as a chargeable amount, if paid as anticipated by the scheme administrator as a scheme pension/lump sum combination.

Using the 20:1 relevant valuation factor the scheme administrator establishes that a scheme pension of £5,625 (which represents a crystallised value of £112,500 through BCE 2), with the maximum permitted pension commencement lump sum of £37,500, would take John up to his 100% lifetime allowance level. The remaining lump sum entitlement of £37,500 will still be paid, but as a lifetime allowance excess lump sum.

John is given the option of giving up the remaining £5,625 scheme pension in return for a further lifetime allowance excess lump sum. However, the scheme uses a commutation factor of 15:1 to give John £84,375 in return for giving up this part of his pension entitlement.

John decides to take the lump sum option giving a total (gross) lifetime allowance excess lump sum of £121,875 (£37,500 + £84,375). This is the chargeable amount for the purposes of the lifetime allowance charge. After the scheme administrator deducts the 55% lifetime allowance charge due from this payment John gets a net lump sum of £54,844. This net lump sum is the amount which crystallises for lifetime allowance purposes through BCE 6.

The amount actually crystallising for lifetime allowance purposes is £204,844 (£150,000 + £54,844). This is made up of the following elements.

• The maximum pension commencement lump sum payment of £37,500 crystallising through BCE 6. This is ranked as the first BCE that occurs.
• The reduced scheme pension entitlement of £5,625 per annum crystallises £112,500 through BCE 2. This is ranked as the second BCE that occurs.
• A lifetime allowance excess lump sum payment of £54,844 crystallising through BCE 6. This is ranked as the third BCE that occurs.

So the chargeable amount arising is actually only £121,875, not the £150,000 amount anticipated originally, based on John’s full scheme pension entitlement.