RPSM11104290 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Scheme pension - BCE 2: Prevention of overlap - miscellaneous issues

Prevention of overlap in a money purchase arrangement - miscellaneous issues

Where a scheme pension is provided from a drawdown pension fund (before 6 April 2011 an unsecured pension fund) in existence on 6 April 2006

[Article 29 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 SI 2006/572]

Any pension being paid to a member aged under 75 on 5 April 2006

• as income withdrawal from a personal pension scheme,
• direct from the funds of a small self-administered scheme (SSAS) in accordance with paragraphs 20.39 to 20.42 of the IR12(2001) Practice Notes on the Approval of Occupational Pension Schemes and the scheme rules did not require an annuity to be purchased for the individual,
• direct from the funds of a SSAS approved under s 590 ICTA 1988 where the scheme rules did not require an annuity to be purchased for the individual, or
• as income drawdown to a member aged under 75 from any retirement benefits scheme (including a SSAS) within the requirements laid out in Appendix XII of the IR12(2001) Practice Notes on the Approval of Occupational Pension Schemes.

from a money purchase arrangement in a scheme that becomes a registered pension scheme on 6 April 2006 will become an unsecured pension (from 6 April 2011 drawdown pension) from 6 April 2006 onwards. The sums and assets used to fund this unsecured pension will become an unsecured pension fund (from 6 April 2011 drawdown pension fund) held in a separate arrangement. No further contributions may be made to such a ‘ring-fenced’ arrangement.

Where a scheme pension is later provided from this unsecured pension fund there will be no benefit crystallisation event in respect of so much of the scheme pension that represents the conversion of the unsecured pension to scheme pension. For example scheme pension worth £1 million is provided. Of this, £750,000 of the fund for the scheme pension is derived from an arrangement from the application of funds used to provide income withdrawal from a personal pension before 6 April 2006. So only £250,000 of the scheme pension provision, which has come from uncrystallised rights, is a BCE.

Provision of a scheme pension following payment of an alternatively secured pension

The position is not the same where a scheme pension entitlement arises following a period of alternatively secured pension. That is because the scheme pension entitlement here will have arisen after the individual attained age 75.

Where entitlement to a scheme pension arises after age 75 there is no lifetime allowance test and BCE 2 is not triggered.

From 6 April 2011, the position is the same where the scheme pension entitlement arises in relation to drawdown pension and the individual has attained age 75.