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Pensions Tax Manual

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Member benefits: lump sums: Pension commencement lump sum (PCLS): applicable amount

Glossary PTM000001
   

The applicable amount
Circumstances where the applicable amount is reduced
The applicable amount and the lifetime allowance
Entitlement to a drawdown pension
The applicable amount when purchasing a lifetime annuity contract from uncrystallised funds
The applicable amount when purchasing a joint lifetime annuity or deferred annuity contract from uncrystallised funds
The applicable amount for an arising entitlement to a scheme pension under a money purchase arrangement
The applicable amount for an arising entitlement to a scheme pension under a defined benefits arrangement
Where part of the scheme pension entitlement is commuted to provide the lump sum
Deductions to the applicable amount where dealing with a scheme pension
Abatement of a scheme pension under a public service pension scheme
Anti-avoidance measures on transfer
Anti-avoidance measures on surrender

 

The applicable amount

Paragraph 1 to 3 Schedule 29 Finance Act 2004

The basic rule is that 25% of the total lifetime allowance crystallisation value of the pension/ lump sum entitlements arising at a particular time in an arrangement or arrangements under a registered pension scheme may be paid as a pension commencement lump sum, provided these entitlements do not fall into certain excluded categories.

The payment may be made up to 6 months before and 12 months after the member becomes entitled to the lump sum. However, it will only become a pension commencement lump sum and therefore an authorised payment when the entitlement arises. For the purposes of valuation against the lifetime allowance, the amount crystallised by the pension commencement lump sum is the amount which was paid. The maximum level of pension commencement lump sum payable is capped by reference to the capital value of the pension benefit (or benefits) the lump sum is linked to. The lump sum must be linked to one or more arising entitlements to:

  • income withdrawal (drawdown pension) (see from PTM062700), which also explains why we are looking at an entitlement to income withdrawal and not a short-term annuity),
  • a lifetime annuity (see PTM062400), or
  • a scheme pension (see PTM062300).

The calculation is referred to in the legislation as the applicable amount.

As the three types of relevant pension entitlement are different in nature the legislation sets out how the applicable amount should be calculated for each type.

For example, with a scheme pension, there is no earmarked fund value to which the calculation can be linked. So the method of calculating the applicable amount is very different from the other two methods of calculation.

Where the lump sum is being paid from a different arrangement to that in which the entitlement to the relevant pension has arisen (whether in whole or in part), when calculating the applicable amount, account should be taken of any other pension commencement lump sum being paid from the same arrangement as the relevant pension that is linked to that pension entitlement.

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Circumstances where the applicable amount is reduced

A disqualifying pension credit

Paragraph 2(1) to (5) Schedule 29 Finance Act 2004

The applicable amount must be reduced where the funds or rights being crystallised include a disqualifying pension credit. PTM063230 explains what a disqualifying pension credit is and why the applicable amount is restricted because of such rights.

Overlap in a money purchase arrangement

Paragraph 3(5) and (8)(a) Schedule 29 Finance Act 2004

A pension commencement lump sum may not be paid when a lifetime annuity contract is purchased under a money purchase arrangement from a drawdown pension fund or flexi-access drawdown fund (or where a scheme pension is provided by the application of such funds). The value of such annuities or scheme pensions arising from drawdown pension funds or flexi-access drawdown funds is discounted in calculating the applicable amount.

The purpose of the restriction is to ensure that no more than one tax-free lump sum may be paid in respect of the same funds. The funds being used to purchase the annuity contract would already have generated an entitlement to a pension commencement lump sum when they were previously designated to provide a drawdown pension. This rule applies whether or not a lump sum payment was actually taken at that time, and whether or not the funds originally designated were lower in value than the funds being used to purchase the annuity.

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The applicable amount and the lifetime allowance

Paragraph 2(5) to (8) Schedule 29 Finance Act 2004

No further pension commencement lump sums may be paid in respect of a member once they have crystallised benefits up to the standard lifetime allowance, subject to any revaluation of crystallisations that occurred in previous tax years. This is referred to in the legislation as the ‘available portion of the member’s lump sum allowance’.

In the 2015-16 tax year the maximum potential lump sum allowance is £312,500, which is 25% of the standard lifetime allowance of £1.25 million. To calculate the available portion, the £1.25 million is reduced by reference to the amounts that had crystallised for lifetime allowance purposes at previous BCEs, revalued to reflect the change in the standard lifetime allowance since those BCEs. 25% of the resulting figure will represent the available portion of the member’s lump sum allowance. PTM063250 gives more information on this restriction.

The maximum that can be paid as a tax-free pension commencement lump sum is the lower of the available portion of the member’s lump sum allowance and the applicable amount. Where a member’s total crystallised benefits reach the standard lifetime allowance the available portion of the member’s lump sum allowance will effectively cap the applicable amount.

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Entitlement to a drawdown pension

Paragraph 3(1) and (2) Schedule 29 Finance Act 2004

The applicable amount where uncrystallised funds are being designated to provide drawdown pension under a money purchase arrangement is

  • one third of the total of:

    • the sums designated as being available for the payment of drawdown pension on that occasion under that arrangement,
    • the market value of the assets similarly being designated (taking into account any liabilities associated with that asset, such as a mortgage) under that arrangement,
  • minus any of the sums and assets that represent rights attributable to a disqualifying pension credit (PTM063230) under that arrangement.

PTM063230 explains why the payment of the pension commencement lump sum is linked to an arising entitlement to income withdrawal and not a possible entitlement to a short-term annuity contract.

The legislation sets a limit of a ‘third’ as the applicable amount is measured against the amount being designated for drawdown. One third of the amount designated for drawdown should equal 25% of the amount designated for drawdown plus the lump sum.

Any funds that are attributable to a disqualifying pension credit are deducted from the amount designated for drawdown, as explained in PTM062500 onwards.

Example 1

Amanda has uncrystallised funds held in a money purchase arrangement of £400,000. Amanda wants to draw all her benefits, including the maximum lump sum permitted under the scheme rules of £100,000.

The funds that will be designated to provide drawdown pension total £300,000. There is no disqualifying pension credit. So the applicable amount is £100,000 (a third of £300,000).

The £400,000 potential payments do not bring Amanda up to her lifetime allowance. As the scheme administrator knows Amanda is subject to the standard lifetime allowance they also know that in her case the available portion of the member’s lump sum allowance will be higher than the applicable amount. So, as the lower of the two figures, the permitted maximum will be the £100,000 applicable amount.

The scheme pays Amanda the £100,000 pension commencement lump sum. The remaining £300,000 becomes a flexi-access drawdown fund under the arrangement.

The scheme administrator sends Amanda a statement telling her that she has crystallised £400,000 for lifetime allowance purposes (through BCE 1 and BCE 6), and the total percentage of the standard lifetime allowance used up under the scheme.

Example 2

Mike has £400,000 uncrystallised funds held in a money purchase arrangement, but £200,000 of these funds represent a disqualifying pension credit. Mike wants to take all his benefits under the arrangement, taking the maximum pension commencement lump sum possible with the remainder of the funds being used to generate a drawdown pension.

The scheme administrator must ignore the £200,000 disqualifying pension credit being designated to provide a drawdown pension when calculating the applicable amount.

The easiest way to work out the applicable amount is to take 25% of the uncrystallised funds that are not a disqualifying pension credit. 25% of £200,000 is £50,000.

Paying a £50,000 pension commencement lump sum leaves £350,000 to be designated to provide a drawdown pension. If you deduct from this figure the value of the disqualifying pension credit (£200,000) and divide the resulting figure (£150,000) by three, you get £50,000. Mike’s lump sum is within the permitted maximum.

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The applicable amount when purchasing a lifetime annuity contract from uncrystallised funds

Paragraph 3(3) to (5) Schedule 29 Finance Act 2004

Paragraph 35(2) Schedule 10 Finance Act 2005

The applicable amount when uncrystallised funds are used to purchase a lifetime annuity is one third of the amount used to purchase the annuity contract under the arrangement or arrangements in question. This amount is referred to as the ‘annuity purchase price’.

The legislation sets a limit of a ‘third’ as the applicable amount is measured against the residual funds left to purchase the annuity after the lump sum payment.

Any funds that are attributable to a disqualifying pension credit are deducted from the annuity purchase price, as explained in PTM063230.

Any sums or assets that have previously been designated to provide that member with a drawdown pension are also deducted from the annuity purchase price in calculating the applicable amount. The reason for this is explained in PTM063230, and example 3 below shows how this deduction is applied in practice.

The applicable amount when an annuity is purchased from uncrystallised funds is therefore:

  • one third of

    • the cash sums applied to purchase the lifetime annuity/related dependants’ or nominees’ annuity, plus
    • the market value of any assets (property, shares policies etc.) that are also applied for this purpose (taking into account any liabilities associated with that asset, such as a mortgage),

 

  • minus

    • any of those sums or assets which have previously been designated as available for the payment of drawdown pension, and
    • any of those sums or assets which are attributable to a disqualifying pension credit.

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The applicable amount when purchasing a joint lifetime annuity or deferred annuity contract from uncrystallised funds

A joint-life annuity contract

Paragraphs 3(4), (4A) and (4B) Schedule 29 Finance Act 2004

Paragraphs 30 Schedule 10 Finance Act 2005

If a dependants’ or nominees’ annuity provision is secured at the same time as the member purchases their own lifetime annuity, the total consideration paid for the annuities is included in the calculation of the applicable amount. This can be through the same contract (a joint-life annuity) or through a separate contract secured within seven days before or seven days after the lifetime annuity purchase. So if £100,000 is used to buy a joint-life annuity the applicable amount will be the same as where £100,000 is used to purchase a lifetime annuity solely in relation to the member (with no provision for dependants or nominees).

The legislation refers to the provision of a dependants’ or nominees’ annuity in the above circumstances as a ‘related annuity’ - see PTM072200.

Deferred annuity contracts

The purchase of an annuity contract that is not for the immediate provision of a lifetime annuity to the member will not give rise to a right to a pension commencement lump sum at the time of purchase. Such a right will only arise when benefits are first taken from the contract (when an actual entitlement to a pension arises).

Example 3

Tim has £350,000 of uncrystallised funds in a money purchase arrangement.

In June 2015, he draws benefits of £200,000 from his fund. He draws a £50,000 pension commencement lump sum and uses the rest to provide a drawdown pension. After the payment of the lump sum, Tim has uncrystallised funds of £150,000 and a flexi-access drawdown fund of £150,000 under the arrangement.

In March 2016, Tim’s uncrystallised funds stand at £160,000 (the additional £10,000 being attributable to investment growth and income) and his drawdown pension fund has reduced to £120,000. His total fund under the arrangement is therefore £280,000 at this point.

Tim decides to buy a lifetime annuity contract with all the £280,000 funds held in the arrangement, i.e. with both his uncrystallised funds and drawdown pension fund.

For pension commencement lump sum purposes the £120,000 flexi-access drawdown fund used to purchase the annuity is excluded from the applicable amount calculation.

The easiest way to calculate the applicable amount is to simply take 25% of the uncrystallised funds. 25% of £160,000 is £40,000.

This tallies with the ‘one-third of the annuity purchase price’ calculation. Paying a £40,000 pension commencement lump sum leaves an annuity purchase price of £240,000. If you take off from this figure the value of the drawdown pension fund (£120,000) and divide the resulting figure (£120,000) by three, you get £40,000. Tim’s lump sum is within the permitted maximum.

If instead Tim had used all his funds under the arrangement to buy a joint-life annuity rather than a lifetime annuity, the applicable amount would be the same as above.

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The applicable amount for an arising entitlement to a scheme pension under a money purchase arrangement

Where the member becomes entitled to a scheme pension under a money purchase arrangement, the applicable amount is one third of ‘the scheme pension purchase price’.

‘The scheme pension purchase price’ is the aggregate of:

  • the amount of such of the sums held for the purposes of the pension scheme, and
  • the market value of such of the assets held for the purpose of the pension scheme,

as are applied in (or in connection with) the purchase or provision of the scheme pension and any ‘related dependants’ scheme pension’.

A dependants’ scheme pension is related to a scheme pension payable to a member of a registered pension scheme if:

  • the day on which one is purchased or sums or assets are applied for its provision is no earlier than seven days before, and no later than seven days after, the day on which the other is purchased or sums or assets are applied for its provision, and
  • the dependants’ scheme pension will be payable to a dependant of the member.

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The applicable amount for an arising entitlement to a scheme pension under a defined benefits arrangement

Paragraph 3(6) to (8) Schedule 29 Finance Act 2004

Where a scheme pension is provided under a defined benefits arrangement, there is no fund value but an entitlement to a given pension for life. It is necessary to attribute a notional capital value to that pension entitlement in order to apply the lump sum limit. The scheme administrator must do this by multiplying the annual rate of scheme pension payable in that first 12 months by a relevant valuation factor of 20 (unless exceptionally a higher factor has been agreed with HMRC).

The resulting figure is then used in the applicable amount formula.

(LS + AC)/4

LS = the amount of the lump sum actually being paid.

AC = the amount crystallising for lifetime allowance purposes by reason of the member becoming entitled to the scheme pension through benefit crystallisation event 2, where this occurs before the member reaches age 75 . Where the member becomes entitled to the pension after reaching age 75 (so there is no BCE), AC is the amount that would have crystallised had there been a BCE in relation to the pension. PTM088620 explain how this crystallised value is calculated.

The formula also includes reference to the actual lump sum benefit paid, not just the residual pension benefit. So for scheme pensions, the applicable amount is determined by taking one quarter of the value of the pension plus the lump sum. This is necessary because there may be no actual fund value, and only a notional capital value of a pension entitlement combined with an actual lump sum payment.

Deductions are made from the ‘LS + AC’ formula in the same way, and for the same reasons, as where dealing with a lifetime annuity, namely where:

  • there is a disqualifying pension credit, and
  • where the scheme pension is generated through the application of drawdown pension fund under a money purchase arrangement.

Guidance about these deductions is at PTM063230.

In some circumstances, the scheme will not have a set lump sum entitlement but will simply allow the permitted maximum pension commencement lump sum to be paid, and the entitlement to a lump sum may only be given at the expense of part of the scheme pension entitlement; i.e. through commuting part of that pension entitlement to a given lump sum payment. Guidance on this is further below.

Example 4

Stephen has rights under a defined benefits arrangement. He draws benefits on his normal retirement date of 65 when he is entitled under the rules to a scheme pension of £10,000 per annum, and a lump sum of £40,000.

The scheme administrator calculates the amount that crystallises for lifetime allowance purposes before actually paying benefits (so they can advise Stephen of this fact, and seek confirmation from him that he has available lifetime allowance to cover the amount that will crystallise at the two BCEs).

The amount that will crystallise for lifetime allowance purposes in respect of the scheme pension entitlement is £200,000 (the relevant valuation factor of 20 times £10,000).

So the applicable amount is £40,000 (the lump sum) plus £200,000 (the amount crystallising through BCE 2 in respect of the scheme pension), divided by four, which is £60,000.

Stephen confirms that he has available lifetime allowance to cover the payments for lifetime allowance purposes and is not entitled to an enhanced lifetime allowance. So assuming the lump sum meets all the other requirements, all of the lump sum to be paid represents a pension commencement lump sum and is paid tax-free.

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Where part of the scheme pension entitlement is commuted to provide the lump sum

Where part of the member’s scheme pension entitlement is given up to generate the lump sum payment, it is the actual post-commutation pension which crystallises for lifetime allowance purposes through BCE 2. It is this that is measured in ‘AC’ (see above), not the potential crystallised value of the initial entitlement before commutation.

Where the commutation factor used by the scheme to calculate the level of pension given up in exchange for the lump sum payment is different from the relevant valuation factor used to calculate the crystallised value of the scheme pension, the resulting ‘AC + LS’ figure is not easily identifiable in advance. This is because the lump sum (LS) being generated by the commutation will not be the same as the crystallised value of the scheme pension being given up - therefore the additional ‘LS’ generated will be different to the notional reduction in ‘AC’. So the total of ‘LS + AC’ will vary depending on the actual level of scheme pension being commuted.

As generally in these circumstances the scheme rules will simply allow for the payment of the maximum pension commencement lump sum permitted, the applicable amount will not be immediately apparent, as in order to calculate that amount you need to know the actual lump sum that is going to be paid. Until you know what the lump sum payment is you cannot ascertain what the actual reduced scheme pension entitlement will be (and so cannot calculate ‘AC’).

The applicable amount may be calculated on the following basis, using the known factors of

  • the starting, pre-commutation annual rate of scheme pension, and
  • the commutation factor being applied by the scheme.

The applicable amount can be ascertained by using the following equation

20fg / (20 + 3f)

f = is the commutation factor being applied by the scheme.

g = gross scheme pension entitlement before commutation.

Notes

  1. The statutory formula, HMRC equation and the examples are based on the assumption that the only lump sum the scheme intends to pay is a pension commencement lump sum.
  2. When using the equation there may be slight rounding differences compared to the result achieved using the LS + AC/4 formula. These differences are acceptable to HMRC.

Example 5: the applicable amount where a scheme pension is commuted to provide a lump sum

A £50,000 per annum scheme pension entitlement where none of that pension is commuted to provide a lump sum gives an ‘LS + AC’ value of £1 million (where using a relevant valuation factor of 20). So 0 + (20 x £50,000).

Where part of the scheme pension is commuted to provide a £200,000 lump sum, using a commutation factor of 15:1 (£1 of annual pension is given up for every £15 of lump sum paid ), the ‘LS + AC’ calculation comes to only £933,340. This figure is arrived at as follows.

The ‘LS’ value is £200,000.

The reduced scheme pension entitlement is now £36,667 (as, using the 15:1 commutation factor, £13,333 pension is commuted to provide the £200,000 lump sum).

So ‘AC’ is 20 x £36,667 = £733,340.

So using the formula (LS + AC)/ 4 the applicable amount is

(£200,000 + £733,340)/ 4 = £233,335. So the entire lump sum counts as a pension commencement lump sum (assuming no previous BCEs have occurred).

Example 6: the applicable amount where a scheme pension is commuted to provide a lump sum

The scheme pension entitlement before commutation is £30,000 per annum.

The commutation factor being applied is 15:1 (£1 of annual pension is given up for every £15 of lump sum paid).

The maximum pension commencement lump sum that can be paid is £138,461.

This is calculated as follows using the equation

20fg / (20 + 3f)

20 x 15 x 30,000 /divided by 20 + (3 x 15).

Or £9,000,000 /divided by 65.

The net pension after commutation will be £20,769 per annum (£30,000 minus £138,461/15).

The net pension figure is then used in the LS + AC/4 formula.

‘AC’ = £415,380 (£20,769 x 20).

‘LS + AC’ = £553,841 (£138,461 + £415,380).

A quarter of this brings us to £138,460.25.

This figure also represents a third of ‘AC’, so we can see that the ‘LS + AC/4’ formula is essentially achieving the same result as where dealing with a lifetime annuity or income withdrawal entitlement.

Notes

  1. The statutory formula, HMRC equation and the examples are based on the assumption that the only lump sum the scheme intends to pay is a pension commencement lump sum.
  2. When using the equation there may be slight rounding differences compared to the result achieved using the LS + AC/4 formula. These differences are acceptable to HMRC.

Example 7: the applicable amount where a scheme pension is commuted to provide a lump sum and the lump sum exceeds the permitted maximum

The member of a defined benefits arrangement in accordance with their scheme rules receives a scheme pension after commutation of £15,000 and a lump sum of £105,000 is paid in connection with the pension.

The scheme administrator realises that the lump sum may exceed the pension commencement lump sum permitted maximum. The lump sum satisfies the other conditions for being a pension commencement lump sum (see PTM063200).

A scheme can pay a lump sum in excess of the permitted maximum but if it does so any amount over the permitted maximum will not be a pension commencement lump sum (see PTM063230).

To decide how much of the lump sum can be paid as a pension commencement lump sum, the scheme administrator applies the LS + AC/4 formula.

LS is the £105,000 paid to the member.

AC is the £15,000 scheme pension x 20 = £300,000.

So the applicable amount is £(105,000 + 300,000)/4 = £101,250.

The scheme administrator establishes that the member had £1 million available lifetime allowance at the time he took his benefits. So the available portion is £250,000. As the applicable amount is lower than the available portion, the member’s permitted maximum is the applicable amount of £101,250 (see above).

The member was paid a lump sum of £105,000. The excess over the applicable amount (£3,750) is not a pension commencement lump sum. As, for the purposes of this example, it cannot be paid as any other authorised lump sum payment (see PTM061200) it will be an unauthorised payment subject to the unauthorised payments tax charges (see PTM134100 for details of these charges).

Note: Had the trustees wished to avoid making an unauthorised payment and ensure the entire lump sum paid counted as pension commencement lump sum they would need to ensure that the lump sum paid to the member is no more than 25% of LS + AC.

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Deductions to the applicable amount where dealing with a scheme pension

Paragraph 3(7) and (8) Schedule 29 Finance Act 2004

Paragraph 35(3) Schedule 10 Finance Act 2005

In calculating the applicable amount, the following deductions must be made:

  • amounts attributable to a disqualifying pension credit, or
  • amounts derived from sums and assets in a drawdown pension fund or flexi-access drawdown fund that have funded a scheme pension (in cases where an entitlement to a scheme pension arises under a money purchase arrangement).

In the case of a money purchase benefit, the deduction is from the scheme pension purchase price (before it is later divided by 3). That is, in looking at the purchase price of the scheme pension, do not include any funds that relate to the exclusions bulleted above.

In the case of a defined benefit, the deduction is from the ‘LS + AC’ formula.

The examples above show how this works for defined benefits where the scheme provides separate pension and lump sum, i.e. where there is no commutation of pension. Where defined benefits allow a lump sum only by commutation of pension, then the above exclusion means that the part of the pre-commutation pension that relates to the excluded item becomes non-commutable. In such a case you can use a similar approach to that explained earlier (the 20fg/20 + 3f formula). But in this case a new variable (‘h’) has to be factored in

20fgh / (20 + 3f) 

f = the commutation factor being applied by the scheme.

g = the gross scheme pension entitlement before commutation.

h = the fraction of the scheme pension entitlement that is commutable.

Example 5

John has a £30,000 lump sum entitlement under a defined benefits arrangement and a £15,000 per annum scheme pension entitlement. No pension needs to be commuted to generate the lump sum entitlement.

One third of his pension entitlement is derived from a disqualifying pension credit. So £5,000 of his annual pension entitlement is excluded from the applicable amount calculation. This means only £10,000 of the scheme pension entitlement is included in the applicable amount calculation.

The maximum permitted pension commencement lump sum payable is £57,500. This is calculated as follows using the LS + AC/4 formula.

LS is £30,000.

AC is 20 x £10,000 = £200,000

LS + AC is £30,000 + £200,000 = £230,000

£230,000/4 = £57,500.

So the £30,000 entitlement is within the applicable amount margin.

Example 6

Stephanie holds £200,000 of uncrystallised funds under a money purchase arrangement. £100,000 of these funds represent a disqualifying pension credit. The scheme offers Stephanie the opportunity to give up those funds in return for a £12,500 per annum scheme pension; effectively using a 16:1 commutation factor. Stephanie can commute part of her pension entitlement using a commutation factor of 16:1 to generate a pension commencement lump sum up to the permitted maximum.

Using the formula (20fgh / 20 + 3f) the scheme administrator calculates that the applicable amount is £29,412. This is based on:

f = the scheme commutation factor of 16

g = the scheme pension before commutation of £12,500

h = 0.5 (the fraction of the scheme pension entitlement that is commutable, i.e. not a disqualifying pension credit).

So 20 x 16 x £12,500 x 0.5 divided by 20 + (3 x 16) = £29,412.

It can be checked that this balances with the LS + AC/4 formula as follows:

If a lump sum of £29,412 is paid there is a residual fund of £170,588. Using the scheme commutation factor of 16:1 this generates a residual scheme pension of £10,662. The crystallised value of this (‘AC’) is £213,235.

So LS + AC before considering the element of disqualifying pension credit is £242,647 (£29,412 + £213,235).

This figure is then discounted to reflect the crystallised value of the notional scheme pension entitlement that existed initially that represented a disqualifying pension credit, i.e. the crystallised value of the £12,500 scheme pension that represents the disqualifying pension credit.

This can be represented by the following formula

LS + AC - 20g(1 - h)

So discounting ‘LS + AC’ by 20 x £12,500 x 0.5 (1 - 0.5) = £125,000.

£242,647 - £125,000 = £117,647. A quarter of this is £29,412.

Notes

  1. The statutory formula, HMRC equation and the examples are based on the assumption that the only lump sum the scheme intends to pay is a pension commencement lump sum.
  2. When using the equation there may be slight rounding differences compared to the result achieved using the LS + AC/4 formula. These differences are acceptable to HMRC.

Prevention of overlap

Where the above reduction is being made to reflect the fact that some funds in a drawdown pension fund or flexi-access drawdown fund held under a money purchase arrangement have been applied to provide a scheme pension, then (for the purposes of calculating ‘AC’ in determining the applicable amount only) any deduction that will be applied through the operation of the overlap provisions in BCE 2, to reflect the earlier amount (s) that crystallised through BCE 1 (see PTM088620), is ignored. This is to ensure that no double counting occurs when the deduction above is made.

For example, with a £20,000 per annum scheme pension that is derived in part from a drawdown pension fund or flexi-access drawdown fund, the starting point for calculating ‘AC’ would be £400,000 (20 x £20,000) - not £400,000 minus the earlier amounts crystallised through BCE 1 when that drawdown pension fund or flexi-access drawdown fund was created.

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Abatement of a scheme pension under a public service pension scheme

Where a scheme pension being provided under a public service pension scheme is being abated, the level of that abatement is ignored when calculating the amount that crystallises for lifetime allowance purposes through BCE 2 as that pension entitlement arises (see PTM088620). The abatement has no effect on the maximum pension commencement lump sum payable.

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Anti-avoidance measures on transfer

Where sums or assets held for a money purchase arrangement are subject to a relevant transfer to another arrangement which provides defined benefit rights with the sole or main purpose of increasing the applicable amount when the member becomes entitled to a scheme pension, the scheme under which the ‘relevant defined benefits arrangement’ is held is to be treated as making an unauthorised member payment.

The unauthorised member payment is calculated by finding the amount by which the applicable amount as calculated under the guidance on this page above (at The applicable amount for an arising entitlement to a scheme pension under a money purchase arrangement) exceeds the applicable amount as calculated under the other guidance on this page above (at The applicable amount for an arising entitlement to a scheme pension under a defined benefits arrangement).

Member money purchase funds are subject to a ‘relevant transfer’ if they are transferred so as to become held for the purposes of, or to represent rights under, a defined benefits arrangement relating to the member under any other registered pension scheme.

‘Relevant defined benefits arrangement’ means either:

  • the defined benefit scheme referred to in the preceding paragraph, or
  • any other defined benefit arrangement relating to the member (under the pension scheme or any other registered pension scheme) in the case of which any of the sums or assets held for the purposes of, or representing accrued rights under, the arrangement directly or indirectly represent sums or assets previously held for the purposes of, or representing accrued rights under, the defined benefits arrangement so mentioned.

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Anti-avoidance measures on surrender

Where sums or assets held for a money purchase arrangement are surrendered in exchange for defined benefit rights with the sole or main purpose of increasing the applicable amount when the member becomes entitled to a scheme pension, the scheme under which the ‘relevant defined benefits arrangement’ is held is to be treated as making an unauthorised member payment.

The unauthorised member payment is calculated by finding the amount by which the applicable amount as calculated under the guidance on this page above (at The applicable amount for an arising entitlement to a scheme pension under a money purchase arrangement) exceeds the applicable amount as calculated under the other guidance on this page above (at The applicable amount for an arising entitlement to a scheme pension under a defined benefits arrangement).

Member money purchase funds are subject to a ‘relevant surrender’ if they are surrendered and, in consequence of the surrender there is a corresponding increase in the sums or assets held for the purposes of, or representing rights under, a defined benefits arrangement in the same scheme.

‘Relevant defined benefits arrangement’ means either:

  • the defined benefits scheme referred to in the preceding paragraph, or
  • any other defined benefits arrangement relating to the member (under the pension scheme or any other registered pension scheme) in the case of which any of the sums or assets held for the purposes of, or representing accrued rights under, the arrangement directly or indirectly represent sums or assets previously held for the purposes of, or representing accrued rights under, the defined benefits arrangement so mentioned.