RPSM11105230 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Chargeable amount: Basic amount and a scheme-funded tax payment - scheme pensions

The calculation of the chargeable amount operates slightly differently where a scheme pension is paid and the member’s benefits are reduced under the arrangement, on an actuarial basis, in order to fund the lifetime allowance charge payment due (that is, where dealing with amounts crystallising through BCE 2, BCE 3 or BCE 5 over and above the member’s available lifetime allowance). In these circumstances the legislation requires any reduction in the member’s pension entitlement to fund the charge to be ignored, so that the amount to which the relevant valuation factor is applied (‘P’) is the gross amount of the pension, not the net amount after tax (see RPSM11104220).

For example, if a £20,000 per annum scheme pension entitlement is reduced to £15,000 per annum to reflect a lifetime allowance charge due on that arising entitlement, then ‘P’ is still taken as £20,000. So £400,000 will still crystallise through BCE 2 (20 x £20,000).

Consequently, where dealing with a scheme pension entitlement, any basic amount arising in respect of that entitlement will already represent a measure of the gross value of the pension benefit potentially payable under the arrangement, before any deduction is made to reflect the charge due. So the tax paid by the scheme administrator is not treated as a scheme-funded tax payment in this circumstance (and so does not become part of the chargeable amount).

However, if the individual’s scheme pension benefits are not reduced (or appropriately reduced) so as to reflect the tax payable by the scheme administrator, the tax paid by the scheme administrator is treated as a scheme-funded tax payment (and so is added on to the chargeable amount). This is because the member is effectively being given an extra benefit under the arrangement/scheme. How it is judged whether or not a scheme pension entitlement has been appropriately reduced to reflect the charge paid by the scheme administrator is discussed in RPSM11105240.

RPSM11105260 provides an example illustrating the above.