RPSM11104950 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Pension in payment on 6 April 2006: Example 1 of calculating the capital value

An example calculating the capital value of a pre-commencement pension

On 6 April 2006 John had £900,000 held in a money purchase arrangement. John was also in receipt of a level scheme pension of £20,000 per annum, which started before 6 April 2006 so is a pre-commencement pension for lifetime allowance purposes.

On 8 August 2006 John crystallises his benefits under the money purchase arrangement. This triggers two BCEs (the payment of a relevant lump sum - BCE 6 - and the designation to provide an unsecured pension - BCE 1). The crystallised value of the benefits taken is £900,000, which represents 60% of the standard lifetime allowance at that time.

As this is John’s first BCE after 5 April 2006 the available lifetime allowance at the first of these two BCEs (BCE 6) is reduced by the crystallised value of the pre-commencement pension on 8 August 2006.

The capital value of the scheme pension in payment (‘ARP’) on 8 August 2006 is calculated at £500,000 (25 x £20,000). This represents 33.33% of the standard lifetime allowance (£1.5 million). His available lifetime allowance at that first BCE is therefore only 66.67% of the standard lifetime allowance.

The scheme administrator calculates that, after the two BCEs, in fact 93.33% of the standard lifetime allowance has been used up. This is the 33.33% deemed to have been used up by the pre-commencement pension and the 60% actually used up at the two BCEs (BCE 1 and BCE 6).