RPSM11100050 - Technical Pages: Lifetime allowance: Basic principles: When you test against the available lifetime allowance

When do you test against the available lifetime allowance

The legislation specifies the occasions when a scheme administrator must check whether the amount crystallising at that point exceeds the member’s available lifetime allowance. These occasions are referred to as benefit crystallisation events (BCEs).

There are eleven BCEs (BCEs 1-9 and BCEs 5A and 5B) and these are detailed on RPSM11102010 and RPSM11102020.

The eleven BCEs are constructed to ensure that, ultimately, what could be a sequence of rights to benefits held in a number of registered pension schemes are tested against the individual’s lifetime allowance in a consistent and fair manner.

Most of the BCEs therefore cover particular circumstances where pension rights that have built up under a registered pension scheme are realised by the member, most commonly by a pension benefit coming into payment or a lump sum being paid. But other BCEs also ensure that

• any undrawn entitlements still held in respect of the individual at age 75 are tested for lifetime allowance purposes at that time,
• where the member reaches age 75 having previously designated funds in a money purchase arrangement after 5 April 2006 as available for the payment of drawdown pension (unsecured pension before 6 April 2011), the amount by which the value of their drawdown pension fund at that time exceeds the value of the funds previously designated is tested for lifetime allowance purposes at that time,
• rights transferred to certain overseas schemes are tested at the time of that transfer,
• certain lump sum death benefits paid on the death of the member are tested,
• certain payments made after the death of the member, because entitlement to those benefits could not be established before death, are tested as well (see RPSM09108050), and
• certain amounts of lump sum, which when paid were believed to have been part of the pension commencement lump sum, but were in fact paid in error as it later transpires there was no entitlement under the tax rules to that level of benefit (see RPSM09108040) and such error-payment is not recovered, are also tested.

An individual cannot avoid the lifetime allowance charge by either simply not drawing benefits or taking them overseas.

At a BCE the value of the individual’s pension savings crystallising at that time is measured, and if the current BCE takes the individual over their available lifetime allowance, or if the individual has already exceeded their lifetime allowance, a lifetime allowance charge arises on all or some of the crystallised value of the benefits caught by the event.