RPSM11105250 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Chargeable amount: Example of the breakdown of a chargeable amount

Example of the breakdown of a chargeable amount into the lump sum amount and the retained amount

Matthew has already used up 100% of his lifetime allowance. He still holds £300,000 uncrystallised funds in a money purchase arrangement. Matthew decides to draw these benefits on 3 October 2011 when he is 72 years old.

Matthew tells the scheme administrator that he has no available lifetime allowance, so the scheme administrator knows that any amount crystallising will be a chargeable amount.

The scheme rules give Matthew the option of drawing some or all the chargeable amount as a lifetime allowance excess lump sum or as an authorised pension benefit. Matthew chooses to draw two thirds of the chargeable amount as a lump sum, and use the remaining amount to generate a drawdown pension. A pension commencement lump sum may not be paid as his lifetime allowance has already been fully used.

Before making the payments the scheme administrator calculates the lifetime allowance charge due on the chargeable amount.

Two BCEs occur: the payment of the lifetime allowance excess lump sum (BCE 6) and the designation of funds to provide drawdown pension (BCE 1).

The amount potentially crystallising on the payment of a lifetime allowance excess lump sum (through BCE 6) is £200,000. But the lump sum will be reduced by the scheme administrator to reflect the lifetime allowance charge due on this sum. The lump sum attracts a lifetime allowance charge at the rate of 55% so the lifetime allowance charge due on this part of the chargeable amount is £110,000. The net lifetime allowance excess lump sum paid to Matthew by the scheme is £90,000 (£200,000 - £110,000).

The amount crystallising through BCE 6, plus the lifetime allowance charge paid by the scheme administrator in relation to this payment (a scheme-funded tax payment), represent the lump sum amount of the chargeable amount. The lump sum amount is the £90,000 crystallising through BCE 6 on the payment of the (net) lifetime allowance lump sum, plus the £110,000 scheme-funded tax payment paid by the scheme in respect of the lump sum amount. The £90,000 crystallising through BCE 6 forms part of the basic amount, but the scheme-funded tax payment of £110,000 does not.

The amount crystallising on the designation of funds to provide drawdown pension (through BCE 1), plus the scheme-funded tax payment paid by the scheme administrator in relation to this designation represents the retained amount of the chargeable amount. This sum attracts a lifetime allowance charge at the rate of 25%.

The scheme administrator will fund the lifetime allowance charge due on the designation of uncrystallised funds to provide a drawdown pension direct from those funds. The lifetime allowance charge due on this part of the chargeable amount will be £25,000 (25% of £100,000). So only £75,000 of the £100,000 uncrystallised funds being crystallised is designated to provide a drawdown pension (with the other £25,000 being used to fund the charge due).

The retained amount is the £75,000 crystallising through BCE 1 on the designation of funds to provide a drawdown pension, plus the £25,000 scheme-funded tax payment paid by the scheme in respect of the retained amount. The £75,000 crystallising through BCE 1 forms part of the basic amount, but the scheme-funded tax payment of £25,000 does not.

The total lifetime allowance charge paid is therefore £135,000 (£110,000 + £25,000).

The drawdown pension paid from the drawdown pension fund is still taxable as pension income on Matthew through PAYE.