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HMRC internal manual

Pensions Tax Manual

Member benefits: essential principles: benefits and the lifetime allowance

 

Glossary PTM000001
   

 

The lifetime allowance
Testing against the lifetime allowance
Benefit crystallisation
Where the lifetime allowance is reached
Protecting pre-6 April 2006 benefits from the lifetime allowance
Process for testing against the lifetime allowance

The lifetime allowance

Section 214 to 226 Schedule 32 and Schedule 34 Finance Act 2004

There is no limit on the total amount of authorised benefits a registered pension scheme can provide to its members. However, an individual has a single lifetime allowance on the value of tax-privileged benefits they can draw across all such schemes of which they are a member, and the value of any authorised benefits paid out to an individual in excess of their lifetime allowance is subject to a tax charge known as the lifetime allowance charge. The lifetime allowance for the tax year 2016/17 onwards is £1 million. This set figure is called the standard lifetime allowance. A table showing the levels of the lifetime allowance in earlier tax years is at PTM081000.

The lifetime allowance applies to all pension savings held by an individual in all registered pension schemes, whatever form these schemes take. In certain circumstances an individual may be entitled to a higher lifetime allowance called an enhanced lifetime allowance or a protected lifetime allowance - see PTM090000.

Testing against the lifetime allowance

Section 216(1) and Schedule 32 Finance Act 2004

When a scheme member becomes entitled to any form of benefits under a registered pension scheme, a test is required to ensure that their lifetime allowance has not been exceeded. Similar tests are required in other circumstances, for example if the member dies and certain lump sums are paid or funds are put into drawdown for beneficiaries, if their rights are transferred from the scheme to a qualifying recognised overseas pension scheme, or where they reach age 75 without taking all their benefit entitlements. These testing points are collectively referred to in the legislation as benefit crystallisation events (BCEs) and guidance is from PTM088000.

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Benefit crystallisation

Section 216(1) and Schedule 32 Finance Act 2004

Whenever a BCE occurs, a certain amount is deemed to crystallise for lifetime allowance purposes. The amount crystallised for each of the BCEs is measured in a prescribed way. This amount is then compared to the level of the lifetime allowance in force at the time of crystallisation, or if lower, the level of the individual’s lifetime allowance remaining after allowing for any amounts that crystallised at previous BCEs for that individual, as appropriate.

PTM088600 onwards explains how the crystallised amount is calculated at the various BCEs.

Where the lifetime allowance is reached

Sections 214, 215 and 217 Finance Act 2004

Where an individual reaches their lifetime allowance, any amount that crystallises beyond that point becomes what is called a chargeable amount. This chargeable amount is subject to a tax charge called the lifetime allowance charge. The rate of this charge varies depending on how the chargeable amount has arisen under the scheme. If the chargeable amount arose on the payment of a lump sum the charge is higher. This is described in further detail at PTM085000.

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Protecting pre-6 April 2006 benefits from the lifetime allowance

Section 218(5) and Schedule 36 Finance Act 2004

An individual with accrued rights held within tax-approved pension schemes as at 5 April 2006 may have been entitled to protection from the new lifetime allowance charge where their existing pension fund entitlements at that date exceeded the initial standard lifetime allowance in 2006-07 (£1.5 million) or the value of their entitlements was such that the lifetime allowance may well have become an issue at a later date.

There are two forms of transitional protection that an individual could have applied for in order to protect their pension funds from the lifetime allowance charge

* primary protection - see [PTM092300](https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm092300) for further details
* enhanced protection - see [PTM092400](https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm092400) for further details.

These protections should have been applied for before 6 April 2009.

Similar protection from the lifetime allowance charge may be given where a member’s lump sum entitlement as at 5 April 2006 was greater than is authorised under the rules from 6 April 2006 onwards, irrespective of whether the level of the lifetime allowance is an issue. Further details are given in PTM090000.

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Process for testing against the lifetime allowance

Sections 217 and 254 Finance Act 2004

The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

The Registered Pension Schemes (Accounting and Assessment) Regulations 2005 - SI 2005/3454

Where the BCE occurs whilst the member is alive

Whilst the member is alive, the process of establishing how much of that individual’s lifetime allowance has been used up at a BCE, and whether or not a chargeable amount has arisen, is guided by the reporting requirements imposed through the Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567 on both the scheme administrator and the member. These reporting requirements cover not only circumstances where the scheme administrator or member must make a report to HMRC, but also circumstances where they must provide information to each other.

The scheme administrator is separately and jointly liable with the member for any lifetime allowance charge that arises at a BCE on any chargeable amount that crystallises, and is required to account for that due charge to HMRC (see PTM086000).

Further guidance on the process regarding liability, accountability and reporting requirements is in PTM088400.

Where the BCE occurs following the individual’s death (BCE 5C, BCE 5D or BCE 7)

Where a BCE is triggered on payment of a relevant post-death BCE following the member’s death, the liability for any lifetime allowance charge falls solely on the recipient of the lump sum death benefit payment or beneficiary of the drawdown pension, as appropriate. The member’s personal representatives, not the scheme administrator, have responsibility for establishing whether or not any lifetime allowance charge is due (see PTM087000).

The levels of responsibility involved in this process are set out in the Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567, and can be split into a number of steps. These steps are set out in PTM088500 onwards.