RPSM11105240 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Chargeable amount: Was a scheme funded tax payment made on a scheme pension?

How to determine whether a scheme-funded tax payment has been made where dealing with an arising scheme pension entitlement

Where dealing with the crystallisation of a scheme pension benefit it is necessary to know whether or not the member’s entitlements under the arrangement have been fully reduced so as to reflect the lifetime allowance charge paid by the scheme administrator. If they have been appropriately reduced, then the charge paid by the scheme administrator is not a scheme-funded tax payment, and is not included in the chargeable amount measure.

If the member’s entitlement has not been appropriately reduced, the charge paid by the scheme administrator will represent a scheme-funded tax payment. The charge paid by the scheme will be added on to the chargeable amount (over and above the basic amount), to reflect the benefit provided to the member by the scheme meeting the lifetime allowance tax liability.

With a scheme pension entitlement there is no fund value as such, simply an ongoing pension entitlement which has a notional crystallisation value for lifetime allowance purposes. So it is not immediately clear whether or not benefits have been adequately reduced so as fully to reflect the tax paid by the scheme administrator.

To ensure fairness and consistency of treatment, the legislation prescribes a measure to determine whether or not an individual’s rights have been sufficiently reduced to fully reflect the charge due. The legislation requires that this should be determined in accordance with ‘normal actuarial practice’.

This is relevant where dealing with a chargeable amount arising through BCE 2, BCE 3 or the BCE 5 (when calculating ‘DP’ - see RPSM11104620). These are the three BCEs that deal with scheme pension entitlements. An example of how the above operates is given in RPSM11105260.