RPSM11105210 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Chargeable amount: The lump sum amount and retained amount

The lump sum amount and retained amount

Where a member’s lifetime allowance has been fully used up, any amount crystallising at a BCE beyond that point represents a chargeable amount. And the charge on that amount could be 55%, 25% or a combination of the two rates, depending on whether all or part of that chargeable amount has been crystallised through the payment of a lump sum or not.

It is necessary to distinguish between any chargeable amount that arises on the payment of a lump sum, either to a member or to another person following the member’s death, and any chargeable amount that arises in other circumstances, as the two amounts will be subject to a different level of tax charge.

Any part of the chargeable amount that is paid as a lump sum to the member (or in respect of the member following their death) is referred to as the lump-sum amount. This is the part of the chargeable amount generated through BCE 6 or BCE 7 on the payment of a lifetime allowance excess lump sum, serious ill-health lump sum or a ‘relevant lump sum death benefit’ (see RPSM11104810).

The lifetime allowance charge due on the lump-sum amount is 55%.

Any lifetime allowance charge paid by the scheme administrator in respect of the chargeable amount arising through the lump sum amount will form part of that lump sum amount. This is referred to as a scheme-funded tax payment and is discussed in RPSM11105220.

Any remaining part of the chargeable amount is referred to as the retained amount. This is the amount that will be retained by the scheme (or an overseas pension scheme) or an insurance company to fund pension benefits etc.

The retained amount is subject to a lower charge than the lump-sum amount to reflect the fact that those funds will be taxed at a later point when paid from the scheme, i.e. when paid as a pension. The lifetime allowance charge levied on the retained amount is therefore 25%.

In some circumstances, any lifetime allowance charge paid by the scheme administrator in respect of the chargeable amount arising through the retained amount will itself form part of that retained amount (for the same reason as discussed above with regards the lump sum amount). Again, this is referred to as a scheme-funded tax payment. The position is a little different where dealing with the crystallisation of a scheme pension entitlement - see RPSM11105230 and RPSM11105240. RPSM11105250 gives an example to illustrate this.