RPSM11103530 - Technical Pages: Lifetime allowance: The process for testing: In member's lifetime: Worked examples: The individual has an enhanced lifetime allowance and simultaneous BCEs occur under different schemes
Scheme A contacts the member before the BCE
Lifetime allowance calculations
Scheme A explains position on lifetime allowance charge
Member decides order of benefit crystallisation
Scheme A actions at and after the BCE
Scheme B actions at and after the BCE
Outline scenario
Kevin is a member of two registered pension schemes. He is entitled to an enhanced lifetime allowance. Kevin has an agreed lifetime allowance enhancement factor of 0.5, which gives him a total lifetime allowance of 150% of the standard lifetime allowance.
Under scheme A Kevin’s expected retirement date is 10 December 2010. Kevin’s expected benefits are a scheme pension of £40,000 per annum and a lump sum of £100,000. The crystallised value of these benefits for lifetime allowance purposes is £900,000. This is 50% of the standard lifetime allowance for the 2010/11 tax year (£1.8 million). Scheme A does not allow members to take a lifetime allowance excess lump sum.
Scheme B provides money purchase benefits and has a value of £1 million.
Scheme A contacts the member before the BCE
The administrator of scheme A contacts Kevin four months before his expected retirement date. They tell Kevin what his anticipated benefits are and how much of the lifetime allowance this will use up. The scheme administrator also asks Kevin
- to confirm (and provide evidence of) the amount of lifetime allowance he will have available at his expected retirement date,
- if he has an enhanced lifetime allowance and if so to provide the number on the HMRC certificate confirming his entitlement,
- for details of any pensions Kevin had in payment before 6 April 2006, and
- whether or not Kevin anticipates crystallising any other benefits from any other pension scheme before, or at the same time that, benefits crystallise under scheme A. If benefits are to crystallise on the same day the administrator wants to know the order in which benefits will crystallise for lifetime allowance purposes.
Member’s response to scheme A
Kevin confirms that he wants to take benefits as expected on 10 December 2010. He also advises that,
- he has already used up 70% of the standard lifetime allowance in earlier BCEs and has statements to support this
- he is entitled to an enhanced lifetime allowance and provides the number on the HMRC certificate confirming this,
- his available lifetime allowance is 80% of the standard lifetime allowance (his 150% enhanced lifetime allowance less the 70% already used), and
- he intends drawing benefits with an estimated value of £ 1 million from scheme B on 10 December 2010.
Lifetime allowance calculations
The administrator of scheme A must work out if a chargeable amount is likely to arise. They now know that Kevin has crystallised benefits worth 70% of the standard lifetime allowance (£1.8 million for 2010/11). The benefits crystallising under scheme A are worth 50% of the standard lifetime allowance. So Kevin will crystallise benefits worth 120% of the standard lifetime allowance. As Kevin has enhanced lifetime allowance of 150% of the standard lifetime allowance this alone would not generate a chargeable amount.
But Kevin is also due to crystallise benefits worth £1 million from scheme B. This means the total benefits that will crystallise for lifetime allowance purposes are worth £3.16 million. This is made up of,
| Previous benefits (70% standard lifetime allowance of £1.8 million) | = £1.26 million |
| Scheme A benefits | = £900,000 |
| Scheme B benefits | = £1 million |
As Kevin has an enhanced lifetime allowance of £2.7 million (150% of £1.8 million) this gives a chargeable amount of £460,000.
Scheme A explains position on lifetime allowance charge
The administrator of scheme a writes to Kevin to tell him about the potential lifetime allowance charge due on his benefits and his options. They confirm that their scheme does not allow the payment of a lifetime allowance excess lump sum, and give Kevin an estimate of the likely reduction in his pension and lump sum if he chooses to trigger the chargeable amount through their scheme. They ask Kevin for a decision as to whether the benefits from scheme A or scheme B will crystallise first for lifetime allowance purposes.
Member decides order of benefit crystallisation
After taking financial advice Kevin decides to generate the chargeable amount under scheme B as he can receive a lifetime allowance excess lump sum from that scheme. Kevin confirms this choice with the administrators of both scheme A and scheme B. So the order in which benefits crystallise will be
- Pension commencement lump sum under scheme A - BCE 6
- Scheme pension under scheme A - BCE 2
- Designation of funds to provide an unsecured pension under scheme B - BCE 1
- Lifetime allowance excess lump sum under scheme B - BCE 6
Scheme A actions at and after the BCE
Scheme A pays Kevin his expected benefits of a scheme pension of £40,000 per annum and a pension commencement lump sum of £100,000. They give Kevin a statement confirming that he has crystallised benefits worth 50% of the standard lifetime allowance through their scheme.
The administrator needs to make an Event Report to HMRC by 31 January 2012, as Kevin has only avoided a liability to a lifetime allowance charge at BCEs under both schemes due to his entitlement to an enhanced lifetime allowance.
Scheme B actions at and after the BCE
Kevin tells the administrator of scheme B about his previous benefits crystallisations, including those that will crystallise from scheme A. So the scheme administrator knows that when benefits crystallise under their scheme Kevin will only have £540,000 available lifetime allowance. This is Kevin’s enhanced lifetime allowance of £2.7 million (150% of the standard lifetime allowance) less £2.16 million previously crystallised.
No pension commencement lump sum can be paid as Kevin has previously crystallised benefits equivalent to more than the standard lifetime allowance level. Kevin designates £540,000 to provide an unsecured pension under scheme B taking him up to his available lifetime allowance level. The remaining £460,000 is taken as a lifetime allowance excess lump sum.
The administrator deducts the £253,000 lifetime allowance charge due from the lifetime allowance excess lump sum and makes a net payment of £207,000 to Kevin. The administrator accounts for this tax to HMRC within 45 days of the next quarterly accounting point (31 December 2010).
Within 3 months of the BCE, the administrator gives Kevin a notice setting out the amount of lifetime allowance charge they deducted from the chargeable amount, how they calculated this and confirming when they accounted for the due tax to HMRC. They also send Kevin a statement confirming the amount that he has crystallised under scheme B and the percentage of the standard lifetime allowance that this amount represents.
The administrator needs to make an Event Report to HMRC by 31 January 2012.
| Glossary (RPSM20000000) |
