RPSM11104250 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Scheme pension - BCE 2: Scheme pension taken before normal minimum pension age
Where a scheme pension entitlement is taken before the normal minimum pension age
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If a scheme pension entitlement arises under a registered pension scheme before the normal minimum pension age, and the ‘ill-health condition’ is not met (so the pension is not paid in accordance with ‘pension rule 1’ - see RPSM08100010 and RPSM08100070 - a lifetime allowance test will not be triggered under BCE 2 until the member reaches that acceptable age range.
It is only when the member reaches normal minimum pension age that they are effectively deemed to become entitled to the scheme pension under the lifetime allowance legislation. This is because up until that time the payments will represent unauthorised member payments and will be taxed as such.
As soon as the member reaches the normal minimum pension age the pension payments stop being unauthorised member payments and will come within the scope of BCE 2.
At this point the capital value of the pension in payment at that time will need to be tested against the member’s available lifetime allowance. The amount crystallising will be calculated by multiplying the pension payable to the member for the first 12 months following the date on which the normal minimum pension age was reached by the relevant valuation factor that applies (so generally by 20).
The above is equally relevant where the liability for that scheme pension was previously secured through the purchase of an annuity contract with an insurance company.
RPSM11102100 explains why an unauthorised member payment is not tested for lifetime allowance purposes.