RPSM11105080 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Overview: Where the two rates of lifetime allowance charge apply

Where the two rates of lifetime allowance charge apply

Where a chargeable amount arises through BCE 6 or BCE 7 following the payment of a relevant lump sum or relevant lump sum death benefit, that amount attracts a lifetime allowance charge at the rate of 55%.

The payments that may attract the 55% rate are

• a serious ill-health lump sum (seeRPSM09104600),
• a lifetime allowance excess lump sum (see RPSM09105200),
• a defined benefits lump sum death benefit (see RPSM10104030), or
• an uncrystallised funds lump sum death benefit (see RPSM10104060).

For the avoidance of doubt, a pension commencement lump sum cannot give rise to a chargeable amount - apart from the two occasions set out below. This is because a pension commencement lump sum is always limited to a percentage of the individual’s available lifetime allowance. A lifetime allowance charge may be due on the following two types of protected lump sum if the member does not have enough available lifetime allowance to cover the whole lump sum.

1. Protected lump sum of more than £375,000 with primary protection - see RPSM03105170, and
2. Scheme specific protection of lump sums over 25% - see RPSM03105620 

Any part of the chargeable amount crystallising that is not derived from a lump sum payment (and so is retained within the scheme, or an overseas scheme) attracts a lifetime allowance charge at the rate of 25%. These are chargeable amounts crystallising through BCE 1 to BCE 5 and BCE 8.

The lifetime allowance test and lifetime allowance charge only come into play when a BCE occurs. This is when the benefit is actually paid, becomes payable, is transferred or crystallises because the member has reached their 75^th birthday.

The rate of charge will be a question of fact, depending on what event has triggered the BCE(s).

Why the two rates of charge

The rates imposed through the lifetime allowance charge have been set broadly to nullify the earlier tax advantages associated with the build up of the relevant funds or rights.

The reason for the higher rate for lump sums is that such amounts will not be taxed later, whereas other amounts will be retained by the scheme and paid out later as pension income taxable on the member.