RPSM11105280 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Chargeable amount: Are crystallised payments lump sum or retained amounts
Whether amounts crystallising at the eleven BCEs potentially fall within the lump-sum amount or retained amount
| Finance Act 2006 Schedule 23 paragraph 30 [s215][s216] |
A lifetime allowance test is only triggered, and a lifetime allowance charge only arises, when a BCE actually takes place. It will be clear from the type of BCE involved whether the chargeable amount is a lump-sum amount or a retained amount.
If the amount crystallised is retained in the scheme (or in an overseas scheme) to provide pension benefits then the chargeable amount is a retained amount taxable at 25%. This applies to any amount crystallising over and above the member’s available lifetime allowance through BCE 1, BCE 2, BCE 3, BCE 4, BCE 5, BCE 5A, BCE 5B and BCE 8.
If the amount crystallised is paid as a lump sum, to or in respect of the member the chargeable amount is a lump sum amount taxable at 55%. This applies to any amount crystallising over and above the member’s available lifetime allowance through BCE 6, 7 or 9.
Where a BCE is triggered at age 75 (BCE 1 (BCE 5B on or after 6 April 2011) and BCE 5 and BCE 5A)
[s216, para 2 & 12(1A) Sch 29][Para 30 Sch23 FA 2006]
Where a lifetime allowance test has been triggered (through any or all of BCE 1 up to 5 April 2011, replaced by BCE5B from 6 April 2011), BCE 5, BCE 5A) because the member has reached their 75th birthday and benefit entitlements have not yet been crystallised, any amount crystallising through these BCEs, over and above the available lifetime allowance, will form part of the retained amount. Any lifetime allowance charge will therefore be at the lower 25% rate.
Although there is a reference to prospective lump sum benefits within BCE 5, no actual lump sum is being paid and no benefit crystallises through BCE 6. No lump sum amount will therefore be generated.
When the scheme does pay out benefits to the member after age 75, those entitlements or payments will be taxed accordingly as they arise. Before 6 April 2011, no authorised lump sum benefits could be paid to the member once they have reached age 75, except a refund of excess contributions lump sum, so the arising entitlement should be to a pension benefit, which will be taxed on the individual through PAYE.
Before 6 April 2011 therefore, if a lump sum is paid to the member it will be an unauthorised member payment (unless a refund of excess contributions lump sum), and will be taxed at a rate that at least matches the 55% higher rate of lifetime allowance charge (see RPSM11102100). Choosing not to draw benefits was therefore of no tax advantage to the member in relation to the lifetime allowance charge.
From 6 April 2011, where the member has uncrystallised funds at age 75 and later uses those funds to pay member benefits, a lump sum may be paid to the member as an authorised member payment subject to meeting the conditions for the type of lump sum paid (e.g. a pension commencement lump sum or a serious ill-health lump sum), and will be taxed accordingly. See RPSM09104000 for details of authorised lump sum payments and their tax treatment. One of the conditions for paying such lump sums is that the member has available lifetime allowance. When checking whether the member has available lifetime allowance the scheme administrator should ignore any lifetime allowance previously used up on reaching age 75 by BCE 5 or BCE 5B. However, anything which would have been a benefit crystallisation event but for the member being aged over 75 when it occurred is to be treated as though it were such an event. The same applies to a pension commencement lump sum to which BCE 6 did not apply because it was paid in respect of a money purchase arrangement and the member became entitled to it before reaching age 75 but it was not paid until after they reached that age.
So if the member has exceeded their LTA through BCE 5 or BCE 5B a lump sum may still be payable as an authorised member payment if, as a result of not having to take account of the amount of LTA used up by that BCE, the member turns out to have sufficient available lifetime allowance to cover the lump sum. But this will not be the case if the BCE that caused the member’s LTA to be exceeded was some other BCE. In such cases the payment of the lump sum will always be an unauthorised member payment (unless a refund of excess contributions lump sum), and will be taxed at a rate that at least matches the 55% higher rate of lifetime allowance charge (see RPSM11102100).
Example
In tax year 2006/07 Trevor crystallised part of his total pension funds with a value of £750,000, taking the maximum available pension commencement lump sum of £187,500 and used the rest of the funds to provide a pension. As the lifetime allowance for that tax year was £1.5 million, Trevor has crystallised funds in a money purchase arrangement worth 50% of his lifetime allowance. Trevor still has other uncrystallised funds worth £750,000 also in a money purchase arrangement.
In tax year 2011/12 Trevor reaches age 75. He has still not crystallised any of his other uncrystallised funds which are now worth £900,000. These uncrystallised funds are tested against the lifetime allowance as a BCE 5B as remaining unused funds. The amount of remaining unused funds is £900,000. The standard lifetime allowance for tax year 2011/12 is £1.8 million. Trevor has already used up 50% of his lifetime allowance. He therefore has lifetime allowance of £900,000 available. As the amount of Trevor’s remaining unused funds is also £900,000 Trevor is not liable for a lifetime allowance charge but has now used up 100% of his lifetime allowance.
Later in the same tax year Trevor decides to take his benefits. He is now aged over 75. His uncrystallised funds are still valued at £900,000. Trevor wishes to take £225,000 as the maximum permitted pension commencement lump sum and designate the remaining funds for the provision of drawdown pension.
To take a lump sum as a pension commencement lump sum Trevor needs to have available lifetime allowance. He has apparently already used up his entire lifetime allowance. However, since the amounts crystallised by BCE 5B can be ignored for the purposes of calculating his available lifetime allowance for the purposes of taking an authorised lump sum payment, including a pension commencement lump sum, Trevor still has £900,000 available lifetime allowance so the £225,000 can be paid as a pension commencement lump sum.
If Trevor had instead taken his benefits in relation to his remaining unused funds in 2 tranches in the same tax year (2011/12) after age 75, the benefits taken in the first tranche would be treated as BCEs for the purposes of calculating his available lifetime allowance when he takes his second tranche of benefits. So the aggregate pension commencement lump sum he could take might still be £225,000.
Transfer to a qualifying recognised overseas pension scheme (BCE 8)
Where a transfer is made to a qualifying recognised overseas pension scheme, any part of that transfer payment crystallising through BCE 8 over and above the individual’s available lifetime allowance falls as a retained amount. So any lifetime allowance charge would be charged at the rate of 25%.
Although a sum is being paid in full from the scheme, the payment is not being made to the individual (but the overseas scheme). The monies are still retained within a pension scheme, to provide the individual with pension benefits at a later date.
| Glossary (RPSM20000000) |
