RPSM11104920 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Pension in payment on 6 April 2006: How a pension is treated for lifetime allowance purposes

How a pre-commencement pension is treated for lifetime allowance purposes

[s219(8)][Para 10(2) and 20, Sch 36 & The Pension Schemes (Part 4 of the Finance Act 2004 Transitional [and Transitory] Provisions Order 2006 – to be laid]

The Taxation of Pension Schemes (Transitional Provisions) Order SI 2006/572

The way the legislation considers a pre-commencement pension is by saying that, where the first BCE is triggered on or after 6 April 2006, the amount of lifetime allowance available at that first (and subsequent) BCE(s) will be reduced as if another BCE had occurred immediately before that first BCE, which caught the crystallised value of any pre- commencement pensions in payment to the member at that time.

[s219(7) and article 20 of the Taxation of Pension Schemes (Transitional Provisions) Order SI 2006/572]

For the avoidance of doubt where the first benefit crystallisation event that occurs after 5 April 2006 is BCE 7 – the payment of a lump sum death benefit – the pre- commencement pension will be a deemed BCE. The member’s available lifetime allowance will be reduced accordingly before the BCE 7.

RPSM11104930 to RPSM11104970 explain how the crystallised value of such a pre- commencement pension is calculated, depending on the actual nature of the pension in payment. The calculation is based on the level of pension in payment at that deemed BCE date, not what the amount in payment is on 5 April 2006.

The crystallised value of any pre-commencement pension in payment therefore needs to be considered by a scheme administrator where they are dealing with a scheme member who becomes subject to a BCE under their scheme and who has not been subject to a BCE before (see RPSM11103140). RPSM11103400 explains how the reduction of the available lifetime allowance at that first BCE (and any subsequent BCEs) is recorded for member statement purposes.

If no BCE is triggered on or after 6 April 2006, the pre-commencement pensions will never be considered for lifetime allowance purposes.

No chargeable amount will be created at that deemed BCE

The purpose of the deemed BCE is to limit the level of available lifetime allowance at that first (and subsequent) BCE. It is not a BCE in its own right. No chargeable amount will actually crystallise in relation to any pre-commencement pension in payment at that first BCE. The legislation only ensures that pensions in payment are adequately reflected in the individual’s post 5 April 2006 level of lifetime allowance.

If the amount crystallising at that deemed BCE comes to over 100% of the member’s level of lifetime allowance this simply means that the member has no available lifetime allowance at that first BCE. No chargeable amount actually crystallises at that deemed BCE, and the level of chargeable amount arising at that first actual BCE is not increased simply because the crystallised value of the pre-commencement pension is more than 100% of the member’s actual lifetime allowance figure. All it will mean is that everything crystallising at that first BCE will represent a chargeable amount – see the example on RPSM11104960.