RPSM11100070 - Technical Pages: Lifetime allowance: Basic principles: Where the lifetime allowance is used up

Where the lifetime allowance is used up

Where the amount crystallising at a BCE is more than the member’s available lifetime allowance, that excess becomes what is called a chargeable amount. This amount is subject to a tax charge (referred to in the legislation as the lifetime allowance charge). This charge is intended to negate the tax reliefs those funds will have attracted over time, both on the contributions and the fund growth.

The scheme administrator and the member are jointly and severally liable for the lifetime allowance charge where this charge arises in the member’s lifetime, i.e. where the BCE occurs in any circumstance other than following the member’s death). The scheme administrator is obliged to pay any tax due on the chargeable amount to HMRC (although the scheme administrator may apply to HMRC to be absolved of their liability to pay the charge where they have acted in ‘good faith’ and concluded that no charge is due – see RPSM11105330).

Full payment of the due tax charge by the scheme administrator will discharge both the scheme administrator and the member from any further obligation relating to that tax charge. The member is still required to notify his liability to the tax charge through Self-Assessment (and the scheme administrator must give the member evidence of the amount paid in order for the member to do this). Failure by the scheme administrator to pay the due charge (or the correct level of charge) does not absolve the member of liability for the charge.

Where a member’s lifetime allowance is fully used up, the tax rules allow all the rights crystallising beyond that point to be paid to the member wholly as a lump sum benefit, without offending the authorised member payment rules (provided this is done by age 75). So instead of paying a pension benefit, the scheme rules may allow a member to commute such rights and pay them as a lump sum payment. This is a lifetime allowance excess lump sum.

The level of the lifetime allowance charge arising on the chargeable amount will vary depending on whether a lump sum is paid or whether the monies are retained within the scheme (or transferred to a qualifying recognised overseas pension scheme) to provide a pension benefit etc. Where a lump sum is paid the tax rate is 55%, whereas where the rights are retained in the scheme the tax rate is 25%.

So, for example, if a £200,000 lifetime allowance excess lump sum is to be paid the scheme administrator is likely to hold back £110,000 of the chargeable amount to pay the 55% charge due and only pay the member a net lifetime allowance excess lump sum of £90,000.

The lifetime allowance charge paid by the scheme administrator forms part of any chargeable amount arising at a BCE. So if the scheme administrator effectively meets the tax charge due from scheme resources, rather than by correspondingly reducing the member’s entitlements under the arrangements concerned, the chargeable amount arising at that BCE will be increased correspondingly (as what the legislation calls a scheme funded payment will have been made).

All the above is all explained in detail in RPSM11105000 onwards.

Where the lifetime allowance charge arises on the payment of certain lump sum death benefits following the death of the individual the recipient of the lump sum death benefit triggering the BCE is liable for the charge, not the member’s personal representatives or the scheme administrator making the payment. This is explained in more detail in RPSM11105510 to RPSM11105540.

However, the member’s personal representatives are responsible for establishing whether a chargeable amount arises following the payment of such a lump sum death benefit, and both the member’s personal representatives and the scheme administrator making the payment have certain reporting responsibilities imposed upon them.