# The lifetime allowance and the lifetime allowance charge: chargeable amount where the lifetime allowance is used up

Glossary | PTM000001 |

The lump sum amount and retained amount

The basic amount and a scheme funded tax payment

The basic amount and a scheme funded tax payment - scheme pensions

Example of the breakdown of a chargeable amount into the lump sum amount and the retained amount

Scheme-funded tax payment made on an arising scheme pension entitlement

Example showing where a scheme-funded tax payment is made in relation to an arising scheme pension entitlement

Unauthorised member payments

Whether amounts crystallising at a BCE potentially fall within the lump sum amount or retained amount

## The lump sum amount and retained amount

Section 215(2) to (8) Finance Act 2004

Where a member’s lifetime allowance has been fully used up, any amount crystallising at a benefit crystallisation event (BCE) beyond that point represents a chargeable amount. And the charge on that amount could be 55 per cent, 25 per cent or a combination of the two rates, depending on whether any part of that chargeable amount has been crystallised through the payment of a lump sum.

Any part of the chargeable amount that is paid as a lump sum to the member (or in respect of the member following their death) is referred to as the lump-sum amount. This is the part of the chargeable amount generated through BCE 6 or BCE 7 on the payment of a lifetime allowance excess lump sum, serious ill-health lump sum or a ‘relevant lump sum death benefit’ (see PTM088670 and PTM088680).

The lifetime allowance charge due on the lump-sum amount is 55 per cent.

Any lifetime allowance charge paid by the scheme administrator in respect of the chargeable amount arising through the lump sum amount forms part of that lump sum amount. This is referred to as a scheme-funded tax payment - see PTM086000.

Any remaining part of the chargeable amount is referred to as the retained amount. This is the amount that will be retained by the scheme, an overseas pension scheme or an insurance company to fund pension benefits.

The retained amount is subject to a lower charge than the lump-sum amount to reflect that those funds will be taxed later if paid out as a member’s pension. The lifetime allowance charge levied on the retained amount is therefore 25 per cent.

In some circumstances, any lifetime allowance charge paid by the scheme administrator in respect of the chargeable amount arising through the retained amount will itself form part of that retained amount (for the same reason as explained above in relation to the lump sum amount). This is referred to as a scheme-funded tax payment. The position is a little different where dealing with the crystallisation of a scheme pension entitlement (see below).

## The basic amount and a scheme funded tax payment

Section 215(6), (8) to (9) Finance Act 2004

Paragraph 41 Schedule 10 Finance Act 2005

The amount that actually crystallises through a BCE over and above the member’s available lifetime allowance is referred to as the basic amount of the chargeable amount.

This basic amount will be made up of either a lump-sum amount or retained amount (or a combination of the two) depending on the events taking place. From this breakdown the level of lifetime allowance charge due can be identified - see PTM083000.

For BCEs other than those dealing with the entitlement to a scheme pension, the actual lifetime allowance charge paid by the scheme administrator is referred to in the legislation as a ‘scheme-funded tax payment’, and is added on to the basic amount to form part of the chargeable amount. This is because, for these BCEs, the amount crystallised is the net amount after tax (i.e. the net lump sum paid by the scheme, the net amount being designated to provide a drawdown pension fund, before 6 April 2011 an unsecured pension fund, etc). Adding the tax paid by the scheme administrator ensures that the taxable amount is the gross amount before tax.

Where a scheme-funded tax payment needs to be added to the basic amount to form the chargeable amount, the scheme administrator will want to ensure that the tax they pay, which forms the scheme-funded tax payment, is the same amount that will be due on the gross chargeable amount.

For example, if a member, aged between 55 and 75, with no available lifetime allowance has uncrystallised funds of £100,000 in a money purchase arrangement and wishes to use it to provide a lifetime annuity, the scheme administrator is likely to use £75,000 to purchase the annuity and pay £25,000 to HMRC to cover the lifetime allowance charge due. This will mean that the basic amount is the £75,000 crystallising through BCE 4, the scheme-funded tax payment is £25,000 and the chargeable amount is £100,000. The tax due on the chargeable amount is £25,000, the same amount that the scheme administrator has paid.

If the scheme administrator allowed the full £100,000 to be used to purchase a lifetime annuity and funds the tax out of the scheme’s own resources, then the amount crystallising through BCE 4 would be £100,000. The scheme administrator would need to pay £33,333 of lifetime allowance charge to HMRC as a scheme-funded tax payment - so the chargeable amount would be £133,333 and the charge due (and already paid) would be £33,333.

## The basic amount and a scheme funded tax payment - scheme pensions

Section 215(6), (8) to (9) Finance Act 2004

Paragraph 41 Schedule 10 Finance Act 2005

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 PTM088620.

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 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 explained below.

## Example of the breakdown of a chargeable amount into the lump sum amount and the retained amount

Matthew has already used up 100 per cent of his lifetime allowance. He still holds £300,000 uncrystallised funds in a money purchase arrangement. Matthew decides to draw these benefits immediately - he is 72 years old.

Matthew tells the scheme administrator that he has no available lifetime allowance, so the scheme administrator knows that any amount crystallising will be a chargeable amount.

The scheme rules give Matthew the option of drawing some or all the chargeable amount as a lifetime allowance excess lump sum or as an authorised pension benefit. Matthew chooses to draw two thirds of the chargeable amount as a lump sum, and use the remaining amount to generate a drawdown pension. A pension commencement lump sum or uncrystallised funds pension lump sum may not be paid as his lifetime allowance has already been fully used.

Before making the payments the scheme administrator calculates the lifetime allowance charge due on the chargeable amount.

Two BCEs occur:

- the payment of the lifetime allowance excess lump sum (BCE 6) and
- the designation of funds to provide drawdown pension (BCE 1).

The amount potentially crystallising on the payment of a lifetime allowance excess lump sum (through BCE 6) is £200,000. But the lump sum will be reduced by the scheme administrator to reflect the lifetime allowance charge due on this sum. The lump sum attracts a lifetime allowance charge at the rate of 55 per cent so the lifetime allowance charge due on this part of the chargeable amount is £110,000. The net lifetime allowance excess lump sum paid to Matthew by the scheme is £90,000 (£200,000 - £110,000).

The amount crystallising through BCE 6, plus the lifetime allowance charge paid by the scheme administrator in relation to this payment (a scheme-funded tax payment), represent the lump sum amount of the chargeable amount. The lump sum amount is the £90,000 crystallising through BCE 6 on the payment of the (net) lifetime allowance lump sum, plus the £110,000 scheme-funded tax payment paid by the scheme in respect of the lump sum amount. The £90,000 crystallising through BCE 6 forms part of the basic amount, but the scheme-funded tax payment of £110,000 does not.

The amount crystallising on the designation of funds, to provide drawdown pension (through BCE 1), plus the scheme-funded tax payment paid by the scheme administrator in relation to this designation represents the retained amount of the chargeable amount. This sum attracts a lifetime allowance charge at the rate of 25 per cent.

The scheme administrator will fund the lifetime allowance charge due on the designation of uncrystallised funds to provide a drawdown pension direct from those funds. The lifetime allowance charge due on this part of the chargeable amount will be £25,000 (25 per cent of £100,000). So only £75,000 of the £100,000 uncrystallised funds being crystallised is designated to provide a drawdown pension (with the other £25,000 being used to fund the charge due).

The retained amount is the £75,000 crystallising through BCE 1 on the designation of funds to provide a drawdown pension, plus the £25,000 scheme-funded tax payment paid by the scheme in respect of the retained amount. The £75,000 crystallising through BCE 1 forms part of the basic amount, but the scheme-funded tax payment of £25,000 does not.

The total lifetime allowance charge paid is therefore £135,000 (£110,000 + £25,000).

The drawdown pension paid from the flexi-access drawdown fund is still taxable as pension income on Matthew through PAYE.

## Scheme-funded tax payment made on an arising scheme pension entitlement

Section 215(9) Finance Act 2004

Paragraph 9(3), 13(5) and 14(1B) Schedule 32 Finance Act 2004

Paragraph 43(4), (5) and (7) Schedule 10 Finance Act 2005

Where dealing with the crystallisation of a scheme pension, it is necessary to know whether or not the member’s entitlements under the arrangement have been fully reduced so as to reflect the lifetime allowance charge paid by the scheme administrator. If they have been appropriately reduced, then the charge paid by the scheme administrator is not a scheme-funded tax payment, and is not included in the chargeable amount.

But if the member’s entitlement has not been appropriately reduced, the charge paid by the scheme administrator will represent a scheme-funded tax payment. The charge paid by the scheme will be added to the chargeable amount (over and above the basic amount), to reflect the benefit provided to the member by the scheme meeting the lifetime allowance tax liability.

With a scheme pension entitlement, there is no fund value as such, simply an ongoing pension entitlement which has a notional crystallisation value for lifetime allowance purposes. So it is not immediately clear whether or not benefits have been adequately reduced so as fully to reflect the tax paid by the scheme administrator.

To ensure fairness and consistency of treatment, the legislation prescribes a measure to determine whether or not an individual’s rights have been sufficiently reduced to fully reflect the charge due. The legislation requires that this should be determined in accordance with ‘normal actuarial practice’.

This is relevant where dealing with a chargeable amount arising through BCE 2, BCE 3 or BCE 5 (when calculating ‘DP’) - see PTM088650. These are the three BCEs that deal with scheme pension entitlements.

## Example showing where a scheme-funded tax payment is made in relation to an arising scheme pension entitlement

Harry has already used up 100 per cent of his lifetime allowance. Harry has undrawn benefits in a defined benefits arrangement; a scheme pension entitlement of £20,000 per annum (linked to RPI) and a separate lump sum entitlement of £40,000. Harry decides to draw these benefits immediately - he is 70 years old.

As Harry has already used up all of his lifetime allowance, the crystallised value of any benefits drawn will be subject to a lifetime allowance charge. The crystallised value of these benefits at the two BCEs occurring (BCE 2 and 6) will each form a basic amount of a chargeable amount.

The scheme is not prepared to commute any scheme pension entitlement for a lifetime allowance excess lump sum; Harry must still draw his £20,000 per annum scheme pension.

As Harry has no available lifetime allowance, the £40,000 lump sum will not be a pension commencement lump sum. But it can still be paid as a lifetime allowance excess lump sum.

The scheme intends to pay the lifetime allowance charge without reducing Harry’s entitlements under the scheme. So Harry will still become entitled to a £20,000 per annum scheme pension and receive a £40,000 lump sum payment from the arrangement. The amount that will crystallise on the two BCEs is £440,000. £400,000 crystallises through BCE 2 in relation to the scheme pension entitlement arising (calculated by multiplying the annual pension of £20,000 by a relevant valuation factor of 20) and £40,000 crystallises through BCE 6 in relation to the lump sum paid.

The basic amount of chargeable amount will therefore be £440,000. Of this, £40,000 represents the lump-sum amount and £400,000 the retained amount.

The lifetime allowance charge paid by the scheme in respect of both the lump-sum amount and the retained amount will be a scheme-funded tax payment, which will form part of the chargeable amount, over and above the basic amount. This is true of the amount crystallising through BCE 2 in respect of the scheme pension as well as the amount crystallising through BCE 6 in respect of the lump sum paid. Whilst normally any lifetime allowance charge paid by the scheme administrator in respect of an entitlement to a scheme pension will not be a scheme-funded tax payment, this does not apply where the individual’s benefits are not reduced to reflect the level of charge paid.

The total amount that crystallises as the lump-sum amount will be £40,000 (the lump sum actually paid, as crystallises through BCE 6), plus the lifetime allowance charge paid by the scheme administrator in respect of that amount. The scheme administrator will need to pay £48,889 to HMRC as a scheme-funded tax payment in respect of the lump-sum amount. The lump sum amount of the chargeable amount is therefore £88,889, on which a lifetime allowance charge of 55 per cent is due. The charge due will be £48,889 - the same amount the scheme has paid.

For the retained amount, the amount crystallised will be £400,000 (the amount crystallising through BCE 2 in respect of the scheme pension entitlement arising), plus the lifetime allowance charge paid by the scheme administrator in respect of that amount. The scheme administrator will need to pay £133,333 to HMRC as a scheme-funded tax payment in respect of the retained amount. The retained amount of the chargeable amount is therefore £533,333, on which a lifetime allowance charge of 25 per cent is due. The tax due will be £133,333 - the same amount the scheme has paid.

So, the total chargeable amount arising for both BCEs is £622,222, on which a lifetime allowance charge of £182,222 is due. £440,000 of the chargeable amount is the basic amount, the rest being made up of the scheme-funded tax payments.

## Unauthorised member payments

If a potential chargeable amount is used in a manner that does not conform with the authorised payment rules then, whilst a lifetime allowance test is avoided, the resulting tax charges on any unauthorised member payment made is at least as great as the rates imposed through the lifetime allowance charge. See PTM134100.

## Whether amounts crystallising at a BCE potentially fall within the lump sum amount or retained amount

Paragraph 30 Schedule 23 Finance Act 2006

Sections 215 and 216 Finance Act 2004

A lifetime allowance test is only triggered, and a lifetime allowance charge only arises, when a BCE actually takes place. It will be clear from the type of BCE involved whether the chargeable amount is a lump-sum amount or a retained amount.

If the amount crystallised is retained in the scheme (or in an overseas scheme) to provide pension benefits then the chargeable amount is a retained amount taxable at 25 per cent. This applies to any amount crystallising over and above the member’s available lifetime allowance through BCE 1, BCE 2, BCE 3, BCE 4, BCE 5, BCE 5A, BCE 5B, BCE 5C, BCE 5D, BCE 8 and BCE 9.

If the amount crystallised is paid as a lump sum to or in respect of the member the chargeable amount is a lump sum amount taxable at 55 per cent. This rate is applied to any amount crystallising over and above the member’s available lifetime allowance through BCE 6, 7 or 9.

### Where a BCE is triggered at age 75 (BCE 5, BCE 5A and BCE 5B)

Section 216 Finance Act 2004

Paragraphs 2 and 12(1A) Schedule 29 Finance Act 2004

Paragraph 30 Schedule 23 Finance Act 2006

Where a lifetime allowance test has been triggered (through any or all of BCE 5, BCE 5A or BCE 5B) because the member has reached their 75th birthday and benefit entitlements have not yet been crystallised, any amount crystallising through these BCEs, over and above the available lifetime allowance, will form part of the retained amount. Any lifetime allowance charge will therefore be at the lower 25 per cent rate.

Although there is a reference to prospective lump sum benefits within BCE 5, no actual lump sum is being paid so no benefit actually crystallises through BCE 6. No lump sum amount will therefore be generated.

When the scheme does pay out benefits to the member after age 75, those entitlements or payments will be taxed accordingly as they arise.

Where the member has uncrystallised funds at age 75 and later uses those funds to pay member benefits, a lump sum may be paid to the member as an authorised member payment subject to meeting the conditions for the type of lump sum paid (for example, a pension commencement lump sum or a serious ill-health lump sum), and will be taxed accordingly. See PTM063000 for details of authorised lump sum payments and their tax treatment. One of the conditions for paying such lump sums is that the member has available lifetime allowance. When checking whether the member has available lifetime allowance, the scheme administrator should ignore any lifetime allowance previously used up on reaching age 75 by BCE 5 or BCE 5B. However, anything which would have been a benefit crystallisation event but for the member being aged over 75 when it occurred is to be treated as though it were such an event. The same applies to a pension commencement lump sum to which BCE 6 did not apply because it was paid in respect of a money purchase arrangement and the member became entitled to it before reaching age 75 but it was not paid until after they reached that age.

So if the member has exceeded their lifetime allowance through BCE 5 or BCE 5B, a lump sum may still be payable as an authorised member payment later if, as a result of not having to take account of the amount of lifetime allowance used up by that BCE, the member turns out to have sufficient available lifetime allowance to cover the lump sum. But this will not be the case if the BCE that caused the member’s lifetime allowance to be exceeded was some other BCE. In such cases the payment of the lump sum will always be an unauthorised member payment (unless exceptionally it satisfied the conditions for a refund of excess contributions lump sum). The unauthorised payment will be taxed at a rate that at least matches the 55 per cent higher rate of lifetime allowance charge - see PTM134100.

Example

Trevor crystallised part of his total pension funds with a value of £750,000, taking the maximum available pension commencement lump sum of £187,500 and used the rest of the funds to provide a pension. The lifetime allowance for that tax year was £1.5 million. Trevor has crystallised funds in a money purchase arrangement worth 50 per cent of his lifetime allowance. Trevor still has other uncrystallised funds worth £750,000, also in a money purchase arrangement.

A few years later Trevor reaches age 75. He has still not crystallised any of his other uncrystallised funds which are now worth £900,000. These uncrystallised funds are tested against the lifetime allowance as a BCE 5B as remaining unused funds. The amount of remaining unused funds is £900,000. The standard lifetime allowance for this tax year is £1.8 million. Trevor has already used up 50 per cent of his lifetime allowance. He therefore has lifetime allowance of £900,000 available. As the amount of Trevor’s remaining unused funds is also £900,000, Trevor is not liable for a lifetime allowance charge but has now used up 100 per cent of his lifetime allowance by virtue of the BCE 5B.

Later in the same tax year Trevor decides to take his benefits. He is now aged over 75. His uncrystallised funds are still valued at £900,000. Trevor wishes to take £225,000 as the maximum permitted pension commencement lump sum and designate the remaining funds for the provision of drawdown pension.

To take a lump sum as a pension commencement lump sum Trevor needs to have available lifetime allowance. He has apparently already used up his entire lifetime allowance. However, since the amounts crystallised by BCE 5B can be ignored for the purposes of calculating his available lifetime allowance for the purposes of taking an authorised lump sum payment, including a pension commencement lump sum, Trevor still has £900,000 available lifetime allowance so the £225,000 can be paid as a pension commencement lump sum.

If Trevor had instead taken his benefits in relation to his remaining unused funds in 2 tranches in the same tax year after age 75, the benefits taken in the first tranche would be treated as BCEs for the purposes of calculating his available lifetime allowance when he takes his second tranche of benefits. So the aggregate pension commencement lump sum he could take might still be £225,000.

### Transfer to a qualifying recognised overseas pension scheme (BCE 8)

Where a transfer is made to a qualifying recognised overseas pension scheme, any part of that transfer payment crystallising through BCE 8 over and above the individual’s available lifetime allowance falls as a retained amount.

Although a sum is being paid in full from the scheme, the payment is not being made to the individual, but to the overseas scheme. The monies are still retained within a pension scheme, to provide the individual with pension benefits at a later date. So any lifetime allowance charge would be charged at the rate of 25 per cent.