RPSM11104130 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Unsecured pension - BCE 1: Example

Note: This page has no application where a member reaches age 75 on or after 6 April 2011. For such cases see the example at RPSM11104135.

Example of the crystallisation of unsecured pension through BCE 1

Sylvia has £300,000 held in a money purchase arrangement. On her 71^s t birthday on 6 October 2006 she decides to draw benefits from half the funds held in her arrangement. Sylvia takes a pension commencement lump sum of £37,500 and uses the remaining funds to generate an unsecured pension through income withdrawal.

The payment of the lump sum and the designation of funds to provide an unsecured pension are two BCEs (BCE 6 and BCE 1 respectively) and so trigger a lifetime allowance test.

The scheme administrator calculates the capital value of the benefits crystallised as £150,000. This is based on the actual lump sum to be paid (£37,500) and the market value of the assets representing the unsecured pension fund, as designated by Sylvia.

The scheme administrator also calculates the maximum unsecured pension that may be paid from the unsecured pension fund based on value of that fund. This limit applies for the following five pension years following on from 6 October 2006.

On 6 October 2007 Sylvia decides to secure her maximum annual unsecured pension by purchasing a short-term annuity contract. As no new uncrystallised funds have been drawn or brought into the unsecured pension fund there is no review of limits or a lifetime allowance test.

On 6 April 2009 Sylvia uses £100,000 of her remaining uncrystallised funds. She takes a pension commencement lump sum of £25,000 and uses the remaining £75,000 to increase her unsecured pension fund and generate a higher unsecured pension.

A review of the unsecured pension limit is triggered. A lifetime allowance test is also triggered through BCE 1 by the additional designation of funds and BCE 6 by the payment of the lump sum.

Sylvia is 75 on 6 October 2010. She still has uncrystallised funds of £70,000 held in the arrangement. On her 75th birthday those uncrystallised funds are automatically brought into the unsecured pension fund (deemed designation). The effective date of this is just before midnight (23:59 hrs), 5 October 2010. As BCE 1 has occurred a lifetime allowance test is carried out by the scheme administrator.

The unsecured pension fund then becomes an alternatively secured pension fund under the arrangement immediately following the deemed designation.