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HMRC internal manual

Pensions Tax Manual

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The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: benefit crystallisation events overview

Glossary PTM000001
   

 

What is a benefit crystallisation event (BCE) 
The benefit crystallisation events (BCEs) in brief 
Testing the available lifetime allowance at a BCE 
Unauthorised member payments 
Pensions in payment on 5 April 2006 
Reports to HMRC

Sections 216 and 217 Finance Act 2004

Schedule 32 Finance Act 2004 The Registered Pension Schemes (Authorised Payments) Regulations 2009 SI - 2009/1171

What is a benefit crystallisation event (BCE)

The legislation specifies the occasions when a scheme administrator must check whether the pension benefits arising (crystallising) at that point exceed a member’s available lifetime allowance. These occasions are known as benefit crystallisation events (BCEs).

When a BCE occurs, the scheme administrator compares the value of the member’s pension benefits to the member’s lifetime allowance that is still available. Any crystallising amount that exceeds the level of lifetime allowance available is charged to tax under the lifetime allowance charge. See PTM083000.

The benefit crystallisation events (BCEs) in brief

A BCE arises in the following circumstances:

Taking pensions

BCE 1

Where funds are designated to provide a member with a drawdown pension (see PTM088610).

BCE 2

Where a member becomes entitled to a scheme pension, whether from a defined benefits arrangement or a money purchase arrangement (see PTM088620).

BCE 3

Where a scheme pension already in payment to a member is increased beyond a permitted margin (see PTM088630).

BCE 4

Where a member becomes entitled to a lifetime annuity under a money purchase arrangement (see PTM088640).

Unused funds at age 75 or death

BCE 5

Where a member reaches their 75th birthday under a defined benefit arrangement without having drawn all or part of their entitlement to a scheme pension and / or lump sum (see PTM088650).

BCE 5A

Where a member reaches age 75 with a drawdown pension fund or flexi-access drawdown fund (see PTM088650).

BCE 5B

Where a member reaches age 75 under a money purchase arrangement in which there are remaining unused funds (see PTM088650).

BCE 5C

Where a member dies before their 75th birthday and relevant unused uncrystallised funds remaining at death are designated, on or after 6 April 2015 but before the end of a two-year period, to provide a dependants’ flexi-access drawdown pension or a nominees’ flexi-access drawdown pension. (See PTM088660).

BCE 5D

Where a member dies before their 75th birthday and relevant unused uncrystallised funds remaining at death are used to provide entitlement to a purchased dependants’ or nominees’ annuity. The death must have occured on or after 3 December 2014 with the entitlement arising on or after 6 April 2015 but before the end of a two-year period.  (See PTM088660).

Lump sums

BCE 6

Where the member becomes entitled to a relevant lump sum. Not all the authorised lump sum payments are relevant lump sums (see PTM088670).

Death

BCE 7

Where a relevant lump sum death benefit is paid on the death of the member (see PTM088680). Not all the authorised lump sum payments that may be paid on the death of the member are relevant lump sum death benefits.

Transfer to QROPS

BCE 8

Where a member’s benefits or rights are transferred to a qualifying recognised overseas pension scheme (QROPS) (see PTM088690).

Other

BCE 9

Where certain payments are made to or in respect of a member that constitutes an event that is prescribed in regulations (see PTM088700)

These payments are currently:

  • payments of ‘arrears’ of pension after death
  • excessive pension commencement lump sums (PCLS) based on pension errors
  • PCLS type lump sums paid after death.

Until 6 April 2011, BCE1 also arose where the member reached age 75 still holding uncrystallised funds in a money purchase arrangement. This is now replaced by BCE 5B. Also, on that date unsecured pensions and alternatively secured pensions were replaced by drawdown pensions. If you need to see guidance on these aspects, go to the National Archive pages from RPSM11102000 (external users please refer to http://webarchive.nationalarchives.gov.uk/20140504142140/http://www.hmrc… )).

The issue of when entitlement arises in the context of each of the different BCEs is explained at PTM088200.

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Testing the available lifetime allowance at a BCE

The lifetime allowance

Everyone has a personal lifetime allowance and for most people it’s the standard lifetime allowance. Some people may however have a higher or lower lifetime allowance. See PTM081000.

The lifetime allowance charge

The lifetime allowance charge is charged on the ‘chargeable amount’ whenever a BCE results in an excess over the member’s available lifetime allowance. There are two tax rates, depending on whether the chargeable amount is a ‘lump sum amount’ or a ‘retained amount’ - see PTM083000.

Rate of charge

It should 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 - for which any lifetime allowance charge is 25 per cent. This tax rate is applied 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 and BCE 8.
  • 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 for which any lifetime allowance charge is at 55 per cent. This applies to any amount crystallising over and above the member’s available lifetime allowance through BCE 6, 7 or 9.

The legislation distinguishes between different benefit payments through different BCEs because each needs to be valued in a different way in order to obtain an appropriate measure of its capital value.

Valuing the benefits

The scheme administrator must establish the capital value of the member’s pension savings that the BCE relates to. This is referred to in the legislation as the amount that crystallises at that event (hence the term benefit crystallisation event). This value is then compared to the individual’s lifetime allowance that is still available at the time of the BCE (if any). If the amount crystallising exceeds the level of lifetime allowance available, then the excess represents a chargeable amount.

PTM088400 deals with the processes involved before, at and after a BCE.

The amount crystallising at a BCE depends on the nature of the event concerned - the type of arrangement and the form of the benefits crystallising. Where a lifetime annuity contract is purchased, the crystallised value is the purchase price of that annuity. And where a lump sum is paid, it is simply the amount of lump sum paid. But where a scheme pension is being paid a conversion factor (usually 20) needs to be applied to the annual pension coming into payment in order to arrive at a capital, crystallised value. Once it is in payment, any increases in that pension beyond an accepted margin also trigger a BCE. An exception to the normal rule whereby a scheme pension is valued using a conversion factor is where BCE 9 is prescribed in regulations to apply where arrears of pension are paid after a member’s death. This is where entitlement to those pension instalments for the purpose of the tax rules could not be established before death. In such a case the crystallised amount is the amount of the lump sum that represents the arrears of pension.

PTM088600 onwards explain in more detail how the crystallised value is calculated at each of the different BCEs.

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Unauthorised member payments

Where scheme funds are used to provide a benefit or make a payment that does not conform with the pension rules, lump sum rule or lump sum death benefit rule (and is not one of the other authorised member payments) that payment is an unauthorised member payment.

An unauthorised member payment is not a BCE and will never trigger a lifetime allowance test. This is because unauthorised member payments attract different tax charges.

For example, if a lump sum is paid which does not satisfy the conditions for a pension commencement lump sum (for example, it is not linked to the commencement of a pension benefit) and it does not satisfy the conditions for a serious ill-health lump sum, a stand-alone lump sum or an uncrystallised funds pension lump sum, a lifetime allowance test is not triggered as it is not within BCE 6. If it also fails to satisfy the conditions for any other type of authorised lump sum payment, the lump sum would be taxable on the individual as an unauthorised member payment, and there may also be a scheme sanction charge for the administrator. The effective rate of charge on the unauthorised member payment is therefore likely to at least match the highest rate of lifetime allowance charge.

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Pensions in payment on 5 April 2006

Section 219(8) Finance Act 2004

Paragraph 20 Schedule 36 Finance Act 2004

A pension in payment on 5 April 2006 (what the legislation refers to as a pre-commencement pension) is only taken into account for lifetime allowance purposes when or if a BCE first occurs in respect of that individual, whether under the same or a different registered pension scheme. If no BCE occurs in respect of that individual, the pre-commencement pension will never be considered for lifetime allowance purposes.

When the first BCE for an individual occurs, the amount of lifetime allowance available at that BCE will be reduced by the crystallised value of any pre-commencement pensions in payment at that time, as valued immediately before that BCE. No actual BCE occurs in respect of the pre-commencement pension, so no chargeable amount will ever be generated by it. PTM088300 explains this in more detail, with some examples.

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Reports to HMRC

Regulation 3 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

The scheme administrator is required to report certain events to HMRC, using the Pension Schemes Online Service.

For example, if the member is relying on an entitlement to an enhanced or protected lifetime allowance in order to reduce or eliminate a liability to a lifetime allowance charge at a BCE, the scheme administrator must report this to HMRC - see PTM164100.

For details of the event report, see PTM161100.