RPSM11105350 - Technical Pages: Lifetime allowance: Where the lifetime allowance used up: Liability in the member’s lifetime: Distributing an assumed chargeable amount

How the scheme administrator should distribute the assumed chargeable amount where the member fails to declare their available lifetime allowance

Where the scheme administrator treats the whole amount crystallising at a BCE (or BCEs) as a chargeable amount, because the individual fails to respond to their enquiries, there is still the issue of how the chargeable amount crystallising should be distributed by the scheme administrator. In other words, should it be paid as a lump sum or retained within the scheme to provide a pension benefit.

Where crystallisation occurs at age 75 because the member has failed to draw benefits, it is already a matter of fact that the rights are being retained in the scheme until the member decides to draw benefits. So there is no decision for the scheme administrator to make.

However, whatever the circumstances, the scheme administrator should not distribute the assumed chargeable amount by commuting pension benefits and making a full lump sum payment on the assumption that a lifetime allowance excess lump sum may be paid (for the reason explained below). They should only make such a payment where they have full disclosure from the scheme member. The scheme administrator should instead retain the funds within the scheme to provide a pension benefit.

As the scheme administrator is assuming that the individual has no available lifetime allowance this rules out the payment of a pension commencement lump sum and a serious ill-health lump sum, both of which are dependent on having available lifetime allowance. However, this does not necessarily mean that entitlement to a pension commencement lump sum is lost, as there are provisions permitting the retrospective payment of such a lump sum where it turns out that no chargeable amount in fact arose - see RPSM11105360.

In this circumstance the scheme administrator will always be dealing with BCE 1, BCE 2, BCE 4, BCE 5 or BCE 5B. The crystallised amount assumed to be a chargeable amount will be treated as a retained amount, with the lifetime allowance charge deducted and accounted for at the rate of 25%.

Why a lifetime allowance excess lump sum should not be paid

If the scheme administrator pays a lifetime allowance excess lump sum when one is not due, an unauthorised member payment has been made. All unauthorised payments made by a scheme automatically attract a scheme sanction charge on the scheme administrator, unless the payment is exempt under the legislation. Payments made in such circumstances are not exempt.

HMRC would not accept in such circumstances that the scheme administrator should be discharged from liability for the scheme sanction charge under the good faith provisions in the legislation. This is because if the scheme has clearly acted on insufficient information they could not be said to have reasonably believed that the payment was not a scheme chargeable payment. To avoid this situation arising, the scheme administrator should therefore restrict the form of benefits crystallising in this circumstance to pension benefits only.

Taxation of unauthorised member payments and scheme chargeable payments are dealt with in more detail in RPSM04104500 to RPSM04104880.