RPSM11105260 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Chargeable amount: Example of a scheme funded tax payment

Example showing where a scheme-funded tax payment is made in relation to an arising scheme pension entitlement

Harry has already used up 100% of his lifetime allowance. Harry has undrawn benefits in a defined benefits arrangement; a scheme pension entitlement of £20,000 per annum (linked to RPI) and a separate lump sum entitlement of £40,000. Harry decides to draw these benefits on 3 October 2010.

As Harry has already used up all of his lifetime allowance, the crystallised value of any benefits drawn will be subject to a lifetime allowance charge. The crystallised value of these benefits at the two BCEs occurring (BCE 2 and 6) will each form a basic amount of a chargeable amount.

The scheme is not prepared to commute any scheme pension entitlement for a lifetime allowance excess lump sum; Harry must still draw his £20,000 per annum scheme pension

As Harry has no available lifetime allowance the £40,000 lump sum will not be a pension commencement lump sum. But it can still be paid as a lifetime allowance excess lump sum.

The scheme intends to pay the lifetime allowance charge without reducing Harry’s entitlements under the scheme. So Harry will still become entitled to a £20,000 per annum scheme pension and receive a £40,000 lump sum payment from the arrangement. The amount that will crystallise on the two BCEs is £440,000. £400,000 crystallises through BCE 2 in relation to the scheme pension entitlement arising (calculated by multiplying the annual pension of £20,000 by a relevant valuation factor of 20) and £40,000 crystallises through BCE 6 in relation to the lump sum paid.

The basic amount of chargeable amount will therefore be £440,000. Of this, £40,000 represents the lump-sum amount and £400,000 the retained amount.

The lifetime allowance charge paid by the scheme in respect of both the lump-sum amount and the retained amount will be a scheme-funded tax payment, which will form part of the chargeable amount, over and above the basic amount. This is true of the amount crystallising through BCE 2 in respect of the scheme pension as well as the amount crystallising through BCE 6 in respect of the lump sum paid. Whilst normally any lifetime allowance charge paid by the scheme administrator in respect of an entitlement to a scheme pension will not be a scheme-funded tax payment, this does not apply where the individual’s benefits are not reduced to reflect the level of charge paid.

The total amount that crystallises as the lump-sum amount will be £40,000 (the lump sum actually paid, as crystallises through BCE 6), plus the lifetime allowance charge paid by the scheme administrator in respect of that amount. The scheme administrator will need to pay £48,889 to HMRC as a scheme-funded tax payment in respect of the lump-sum amount. The lump sum amount of the chargeable amount is therefore £88,889, on which a lifetime allowance charge of 55% is due. The charge due will be £48,889 - the same amount the scheme has paid.

For the retained amount the amount crystallised will be £400,000 (the amount crystallising through BCE 2 in respect of the scheme pension entitlement arising), plus the lifetime allowance charge paid by the scheme administrator in respect of that amount. The scheme administrator will need to pay £133,333 to HMRC as a scheme-funded tax payment in respect of the retained amount. The retained amount of the chargeable amount is therefore £533,333, on which a lifetime allowance charge of 25% is due. The tax due will be £133,333 - the same amount the scheme has paid.

So, the total chargeable amount arising for both BCEs is £622,222, on which a lifetime allowance charge of £182,222 is due. £440,000 of the chargeable amount is the basic amount, the rest being made up of the scheme-funded tax payments.