RPSM09104560 - Technical Pages: Member benefits: Lump sums: Pension commencement lump sum: Maximum amount: Available portion: Example 2, calculating the available portion

If the entitlement arose on or after 6 April 2011 you should first read the guidance at RPSM09104195 

Example 2 - calculating the available portion of the member’s lump sum allowance

Chris has £450,000 of uncrystallised funds in a money purchase arrangement. He is also entitled to an enhanced lifetime allowance of 150% of the standard lifetime allowance. (So he has a lifetime allowance enhancement factor of 0.5). Chris has not protected any lump sum rights in existence on 5 April 2006.

In the 2010/11 tax year Chris decides to use all the funds to provide an unsecured pension and the maximum pension commencement lump sum. In this tax year his lifetime allowance is £2.7 million (£1.8 million + {£1.8 million x 0.5}).

Chris has already used up 90% of the standard lifetime allowance. So at the point he will draw benefits, he will have an available lifetime allowance of 60% of the standard lifetime allowance (150% - 90%). This means Chris can crystallise £1.08 million (60% of £1.8 million) before exceeding his available lifetime allowance.

Before Chris draws benefits the scheme administrator writes to him asking him for details of previous crystallisations under other schemes and whether or not he is entitled to an enhanced lifetime allowance.

Chris provides the scheme administrator with the number on the HMRC certificate confirming his entitlement to an enhanced lifetime allowance as evidence of his entitlement. He also tells the administrator that he has already used 90% of the standard lifetime allowance.

The scheme administrator uses this information to work out whether or not Chris has enough available lifetime allowance to cover the amount crystallising under their scheme at that time. The scheme administrator can also use this information to identify what Chris’s available portion of the lump sum allowance actually is.

The scheme administrator now knows that Chris has used up 90% of the current £1.8 million standard lifetime allowance at the point benefits are crystallising for lifetime allowance purposes. This means that previous crystallisations, adjusted by reference to the changes in standard lifetime allowance level, or ‘AAC’, represent £1.62 million (90% of £1.8 million).

So the scheme administrator knows that the available portion of the lump sum allowance is a quarter of £180,000 (£1.8 million - £1.62 million). This is £45,000.

The permitted maximum for Chris is therefore £45,000 (not the applicable amount of £112,500).

But no chargeable amount arises, as the amount crystallising is covered by his available lifetime allowance.