RPSM11104660 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Member reaches age 75 before 6 April 2011 without taking all benefits: Example of benefits from a hybrid arrangement

Note: This page has no application where a member reaches age 75 on or after 6 April 2011. For an example of the position from 6 April 2011 see RPSM11104665.

An example of what happens where a member reaches age 75 before 6 April 2011 without taking their entitlement under a hybrid arrangement

Stephen is accruing benefits under a registered pension scheme on a money purchase basis. The scheme also guarantees that if the monies accrued do not provide a benefit equivalent to n/80ths of his final salary from his employer for every year he has worked for them, they will pay such a benefit direct from the scheme (in exchange for the accrued fund). This would give Stephen an entitlement to a set level of scheme pension under the scheme, part of which can be given up, commuted, to provide a lump sum.

So Stephen’s arrangement is actually a hybrid arrangement under which benefits may ultimately be provided on either a money purchase or defined benefits basis.

Stephen decides that he does not want to draw benefits at his 75^t h birthday as he is still working (even though he would lose the right to a pension commencement lump sum).

As Stephen reaches his 75^t h birthday the scheme administrator calculates the amount that would crystallise at that point if benefits were provided on either the defined benefits or money purchase basis.

They firstly calculate the amount that would crystallise through BCE 1 on the basis that the money purchase route was taken. This is the level of uncrystallised funds that would be deemed to be designated as available to provide an unsecured pension. All uncrystallised funds are designated as Stephen is not entitled to a pension commencement lump sum. The effective point of valuation is just before midnight (23:59hrs) of the day before Stephen’s 75^t h birthday (in this case, close of business that day). The market value of those funds is £500,000 at that point. So the amount that would crystallise through BCE 1 is £500,000.

The scheme administrator then calculates what benefits would crystallise through BCE 5 if the defined benefits promise provided by the scheme was taken at that time. The scheme pension that would be provided would be £20,000 per annum. As any lump sum would be generated by commuting part of that pension, the scheme administrator can ignore this entitlement. The amount that would crystallise under this option is therefore £400,000 (20 X £20,000).

The amount crystallised for lifetime allowance purposes is therefore taken as £500,000 (the higher of the two figures).

The standard lifetime allowance for the tax year in which Stephen is 75 is £1.8 million. So Stephen has crystallised 27.77% of the standard lifetime allowance.