RPSM11101100 - Technical Pages: Lifetime allowance: Level of lifetime allowance: How a lifetime allowance enhancement factor is applied at a BCE

BCEs occurring before 6 April 2012

Where a member becomes entitled to a lifetime allowance enhancement factor their level of lifetime allowance is enhanced at every BCE under any registered pension scheme that occurs in relation to that member from that point on. The extra lifetime allowance they were entitled to at a BCE occurring before 6 April 2012 was obtained by multiplying the standard lifetime allowance that applied at the point of the BCE by the enhancement factor the member is entitled to.

This ensures that the level of enhancement a member is entitled to keeps track with the upward movement of the standard lifetime allowance figure year by year during the period to 5 April 2012. So the enhancement rules worked very much the same way as other aspects of the lifetime allowance rules.

BCEs occurring on or after 6 April 2012 where enhancement factor arises after that date

For 2012-13 and subsequent tax years, if the circumstances generating the enhancement factor did not occur until on or after 6 April 2012, the enhancement rules work in the same way as they did in earlier tax years (see above).

BCEs occurring on or after 6 April 2012 where enhancement factor arose before that date

Where a BCE occurs after 6 April 2012 but the enhancement factor arose before that date, then (except in the case of primary protection), the factor applies to the reduced standard lifetime allowance of £1.5 million for the tax year in which the BCE occurs. However, the level of enhancement is calculated in a way which protects it from the impact of the reduced standard lifetime allowance figure. This is done by multiplying the figure of £1.8 million (rather than the reduced standard lifetime allowance of £1.5 million for that year) by the member’s lifetime allowance factor. Where the individual has primary protection, the level of enhancement obtained is added to the amount of £1.8 million if this is higher than the standard lifetime allowance.

So, unless the BCE occurs on or after 6 April 2012 but the enhancement factor arose before that date, at any BCE, the individual’s lifetime allowance will be the standard lifetime allowance at that time, plus an amount determined by multiplying that same standard lifetime allowance figure by any relevant lifetime allowance enhancement factors the individual is entitled to, as notified to HMRC. If the BCE occurs on or after 6 April 2012 but the enhancement factor arose before that date, the individual’s lifetime allowance is the standard lifetime allowance at that time (unless they have primary protection when the figure of £1.8 million is used instead if it is greater) plus an amount determined by multiplying the figure of £1.8 million (where this is greater than the standard lifetime allowance figure) by any relevant lifetime allowance enhancement factors the individual is entitled to, as notified to HMRC.

The whole process is represented in the legislation by the following formula

Where LAEF is the aggregate of 2 or more factors and at least one of those factors was generated by an event that occurred before 6 April 2012, then the figure of £1.8 (if greater than the standard lifetime allowance at the date of the BCE) should be multiplied by LAEF rather than the standard lifetime allowance factor (see RPSM11101120 for examples). For the avoidance of doubt, the resulting amount is then added to the standard lifetime allowance at the date of the BCE unless the individual has primary protection.

The formula operates to give an individual the appropriate enhanced lifetime allowance, at the appropriate amount, according to the date the BCE takes place.

For simplicity, the legislation also allows an individual to calculate their personal lifetime allowance as a percentage in excess of the standard lifetime allowance and to apply this going forward. For example, a member who is entitled to a lifetime allowance enhancement factor of 0.2 has a personal lifetime allowance of 120% of the standard lifetime allowance. Going forward, when there is a BCE, the amount crystallised will be calculated, as usual, by reference to the standard lifetime allowance for the tax year in which the BCE occurs. So, if an individual with a personal lifetime allowance of 120% has their first BCE in the 2007/08 tax year, when the standard lifetime allowance is £1.6 million, and the amount crystallised is £160,000, the amount of lifetime allowance used up is 10% and the individual’s available lifetime allowance going forward is 110% of the standard lifetime allowance.

A further example is given on RPSM11101110.

RPSM11101120 covers the position where an individual is entitled to more than one lifetime allowance enhancement factor.

The example given in RPSM11103530 shows how in practice a scheme administrator may factor in an entitlement to an enhanced lifetime allowance at a BCE.