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Pensions Tax Manual

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The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: summary of the process for testing BCEs against the lifetime allowance during the member's litetime

Glossary PTM000001
   

 

Who performs the test against the lifetime allowance? 
The process for testing in a member’s lifetime 
What the scheme administrator does at the BCE 
What the scheme administrator may do if the member fails to respond to information request or makes a false statement 
Worked example with multiple BCEs under different pension schemes where a chargeable amount is identified

Who performs the test against the lifetime allowance?

Sections 217 and 254 Finance Act 2004

The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

The Registered Pension Schemes (Provision of Information) Regulations - 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, should take account of the following points:

  • 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, and is required to account for that due charge to HMRC see PTM086000
  • it is a matter for the scheme administrator to decide how to go about obtaining information in order to be able to determine if a lifetime allowance charge arises.

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

Where a relevant post-death BCE occurs, liability for any lifetime allowance charge falls solely on the recipient of the lump sum payment (BCE7), the flexi-access drawdown beneficiary (BCE5C) or the person entitled to the annuity (BCE 5D), as appropriate. The member’s personal representative, not the scheme administrator, have responsibility for establishing whether any lifetime allowance charge is due.

The levels of responsibility involved are expressly laid out in the Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567, and can be split up into a number of steps. These steps are explained at PTM088500.

Where the BCE occurs following the individual’s death - BCE 9

A BCE 9 occurs in relation to the payment of certain authorised member payments prescribed in regulations, some of which relate to pre-death entitlements paid after death.

Where a BCE 9 occurs after the member’s death, the process for establishing how much of the member’s lifetime allowance has been used up at the BCE and whether or not there is chargeable amount is the same as it would be during the member’s lifetime. The scheme administrator still has a joint liability with the deceased member (through the member’s personal representatives). See PTM155000.

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The process for testing in a member’s lifetime

Responsibility of the scheme administrator

The scheme administrator has three basic responsibilities before, when and after a BCE occurs in the member’s lifetime:

  • initially establishing whether or not a chargeable amount arises at a BCE
  • on a quarterly basis, accounting to HMRC for the lifetime allowance charge due on any chargeable amount that arises at a BCE
  • after a BCE, providing the member with (see PTM164100)

    • a statement confirming how much of the member’s lifetime allowance has been used up under the scheme, expressed as a percentage of the standard lifetime allowance, and
    • if a chargeable amount has arisen, a notice confirming the level of chargeable amount that arose at the BCE, the lifetime allowance charge due on this amount and whether the scheme administrator has accounted for the due charge, or intends to do so in due course.

Establish whether or not there is a chargeable amount at a BCE

The scheme administrator is jointly liable for any lifetime allowance charge arising in the member’s lifetime, and is expected to account for any charge due direct to HMRC. So the scheme administrator is expected to take steps before a BCE occurs under their scheme (and, usually, before benefits are paid out) to establish whether or not such a charge will arise.

To do this an administrator will need to liaise with the member concerned, asking for sufficient information so that they can establish if a chargeable amount arises at the BCE.

The legislation does not prescribe how a scheme administrator does this.

Because the scheme administrator is reliant on the information or declaration the member provides to them, the legislation provides for a discharge from their liability to any lifetime allowance charge due where they can show they have acted in ‘good faith’, based on information or statements provided by the member. If the scheme administrator does not take reasonable steps to ascertain if there is a liability to a lifetime allowance charge, HMRC are unlikely to accept that they should be discharged from any liability that in fact arose at a BCE through the ‘good faith’ provisions - see PTM086000.

Schemes are expected to retain documentary evidence of any member statement or information they have relied on so that if necessary they can show that they have reasonable grounds for believing that a chargeable amount did not arise at a BCE.

Issues the scheme administrator will need to consider in order to establish whether or not a chargeable amount arises at a BCE

The first thing a scheme administrator needs to consider is how much will crystallise for lifetime allowance purposes under the member’s arrangements in their own particular scheme at the particular BCE (or BCEs). PTM088600 onwards explains how the crystallised value is worked out for each of the different BCEs . The issues that may be relevant in establishing if the amount crystallising under their scheme will generate a chargeable amount are as follows:

  • how much of the member’s lifetime allowance has crystallised previously under that scheme in relation to that member. (The scheme administrator will already know this).
  • how much has crystallised previously under other registered pension schemes in relation to that member. If there have been any BCEs under another scheme the member will have a statement from that other scheme’s administrator confirming the amount of lifetime allowance they have used up under that scheme - see PTM164400
  • whether the member is entitled to an enhanced or protected lifetime allowance. If they are, they will have been provided with a certificate by HMRC confirming this entitlement. If the member intends to rely on this entitlement at that BCE, they are required to report this to the scheme administrator before the BCE occurs. Alternatively, and more unusually, the member may have a reduced lifetime allowance - see PTM082000
  • whether the member is in receipt of any pre-commencement pensions (pensions in payment on 5 April 2006). If they are:

    • if this is the first BCE occurring in relation to that member under any registered pension scheme, the member’s available lifetime allowance at that BCE will be reduced to reflect the level of pre-commencement pension in payment at that time - see PTM088300
    • if this is not the first BCE occurring in relation to that individual under any scheme, account will still need to be taken of the reduction to their available lifetime allowance that occurred at that first BCE due to any pre-commencement pension in payment at that time (this will not necessarily be reflected in the statement provided by the scheme where that first BCE occurred - see below, and
  • whether other BCEs will occur under other schemes in relation to that member, either between the time the scheme administrator contacts the member and the time the BCE will actually occur under their scheme, or simultaneously with that BCE. Also, whether there have been recent BCEs where the scheme administrator has not yet sent the member a statement
  • the member is aged over 75 and wishes to take a pension commencement lump sum in relation to a connected pension - see PTM063200.

The member’s choices and information

The member is required to provide information to the scheme administrator so that they can calculate the correct amount of lifetime allowance used up by a BCE and any lifetime allowance charge. Details of any protection certificates are particularly important. See PTM164100 for details of the information the member should provide to the administrator in anticipation of, or following a BCE.

Before a BCE takes place the scheme administrator must also consider any choices the member may have over how they take their benefits under the scheme/arrangement. The member’s choice may alter the amount that crystallises for lifetime allowance purposes (as it may affect the resulting BCEs).

Where benefits are being taken by the member, the benefits crystallising for lifetime allowance purposes will be the actual entitlements the member ends up with under the arrangement(s). The effective date of such BCEs will be the date the entitlements actually arise (not the point the scheme administrator first makes contact with the member) - see PTM088200.

For example, where all the funds under an arrangement are being designated to provide a drawdown pension the amount crystallising will be the market value of the sums or assets in the fund at the point of designation. It will not be the fund value at the point the scheme administrator first wrote to the scheme member telling him his options under the scheme.

If a chargeable amount is likely to arise, the member may want to change their options under the scheme. For example, the member may want to take any excess benefits crystallising as a lifetime allowance excess lump sum if the scheme allows this. Again this may affect the amounts crystallising and the level or type of chargeable amount arising.

For example, when crystallising a scheme pension, the actual level of lifetime allowance excess lump sum paid by the scheme in exchange for the excess scheme pension is unlikely to match the crystallised value of the excess pension given up - see PTM085000.

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What the scheme administrator does at the BCE

The scheme administrator will have established whether or not the member’s lifetime allowance will be exceeded at the BCE and the precise level of chargeable amount arising:

  • if a chargeable amount arises the scheme administrator must calculate the amount of lifetime allowance charge due. The rate of the lifetime allowance charge depends on whether or not the chargeable amount is caused by the payment of a lump sum benefit.
  • where the available lifetime allowance has been exceeded, the scheme administrator will normally deduct the lifetime allowance charge due before making any benefit payment to the member or making a transfer payment. So the individual’s entitlement(s) under the scheme are reduced to reflect the charge paid by the scheme administrator.
  • any lifetime allowance charge paid by the scheme administrator otherwise than from or by reducing the member’s benefit entitlement is treated as a scheme-funded tax payment (although see the exception below). This increases the value of the chargeable amount crystallising and the level of lifetime allowance charge due. PTM085000 explains this in more detail.
  • with an entitlement to a scheme pension, a scheme-funded tax payment only arises if the member’s pension entitlements under the arrangement are not reduced to reflect the charge paid by the scheme administrator. Whether or not the member’s entitlement has been properly reduced to reflect the charge paid is established through normal actuarial practice.
  • the scheme administrator accounts for any lifetime allowance charge due to HMRC on a quarterly basis - see PTM164000. The scheme administrator must also consider any reporting requirements of the Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567.
  • PTM164400 explains what information the scheme administrator must provide to the member after the BCE has taken place.

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What the scheme administrator may do if the member fails to respond to an information request or makes a false statement

If the member fails to respond, either:

  • the BCE will not take place (because the scheme administrator refuses to pay out benefits in the absence of adequate information about the member’s lifetime allowance) or,
  • if the event does or must take place, such as where BCE 5, 5A or 5B is triggered at age 75, the scheme administrator is likely to proceed on the assumption that the member has already used all their available lifetime allowance (but see PTM088650).

This is because the scheme administrator is jointly and severally liable for any lifetime allowance charge due, and may want to protect their position - see PTM086000.

When contacting the member, the scheme administrator may want to convey to them the significance of their co-operation in the above process, that they should respond fully and accurately to any questions they are asked, and the fact that liability to pay any tax due falls on both parties.

Section 267 Finance Act 2004

Regulations 6 and 7 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

If the scheme administrator relies on a statement made by a member and the information provided turns out to be incorrect, resulting in the scheme administrator either wrongly calculating that a lifetime allowance charge did not arise at a BCE, or that the charge due was lower than the true amount, they may apply to HMRC to be discharged from their liability.

HMRC will discharge the scheme administrator from their liability where they accept, and it is clearly demonstrated, that the scheme administrator acted in good faith - see PTM135400.

Where a quarterly return has been made to HMRC that understates a liability to a lifetime allowance charge, for example because of an error or omission, the scheme administrator must make an amended return to HMRC - see PTM162000.

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Worked example with multiple BCEs under different pension schemes where a chargeable amount is identified

Outline scenario

Alan is a member of two pension schemes, both of which provide benefits on a defined benefits basis. Alan takes:

  • benefits from scheme A on 8 March 2014 and
  • benefits from scheme B on 1 November 2015.

Alan takes a pension commencement lump sum and scheme pension from each scheme.

Scheme A: what the administrator does before the BCE

Alan tells his scheme administrator he wants to take the maximum permitted pension commencement lump sum and take the rest as a scheme pension entitlement on 8 March 2014.

The scheme administrator calculates the anticipated crystallised value of the benefits to be paid on 8 March 2014 as £1.2 million. This represents 80 per cent of the standard lifetime allowance of £1.5 million for the 2013-14 tax year.

The scheme administrator writes to Alan telling him this and asks Alan to provide a statement outlining his anticipated available lifetime allowance on 8 March 2014. They also ask if he is entitled to an enhanced lifetime allowance, about any pensions he is receiving that came into payment before 6 April 2006, and if he has crystallised or anticipates crystallising any other benefits under any other registered pension scheme before or at the same time as drawing benefits under this scheme.

Alan responds saying he has not drawn any pension benefits from any other source, he is not entitled to an enhanced lifetime allowance, and he has not been subject to a lifetime allowance test and so will have 100 per cent of the standard lifetime allowance available.

On 8 March 2014, the scheme administrator checks the current crystallised value of Alan’s benefits; it is still £1.2 million. As Alan has not used any of his lifetime allowance previously there is no chargeable amount. Benefits are paid out to Alan unadjusted.

Scheme A: what the administrator does after the BCE

Alan receives a statement from the scheme administrator confirming the amount crystallised for lifetime allowance purposes at those BCEs, and the percentage of the standard lifetime allowance this represents (80 per cent). The scheme administrator will send this by the end of the tax year (i.e. by 5 April 2014), and will send similar statements every tax year (up to and including the tax year following that in which Alan reaches age 75).

As the lump sum paid does not exceed 25 per cent of Alan’s pension rights the scheme administrator does not need to make an event report to HMRC.

Scheme B: what the administrator does before the BCE

On 1 November 2014 Alan becomes entitled to a lump sum and a scheme pension at his normal retirement date under scheme B.

The scheme administrator values the crystallised value for lifetime allowance purposes of the pension and lump sum Alan is entitled to at £375,000. This represents 30 per cent of the standard lifetime allowance for the 2014-15 tax year (£1.25 million).

The scheme administrator writes to Alan 4 months before 1 November 2014 (i.e. on or after 1 July 2014) advising him of the above and telling him his options under the scheme rules. They ask Alan for a statement detailing his anticipated available lifetime allowance on 1 November 2014, and if he is entitled to an enhanced lifetime allowance. They also enquire about earlier BCEs, any pensions in payment, and whether or not Alan intends crystallising any other benefits under other schemes before or on 1 November 2014.

Alan responds sending a copy of the latest statement provided by scheme A. He confirms that he is not entitled to an enhanced lifetime allowance and is in receipt of no pensions that came into payment before 6 April 2006 and has had no other BCEs under any other registered pension schemes.

The scheme administrator of scheme B now knows that Alan only has 20 per cent of the standard lifetime allowance available. The benefits payable under this scheme represent 30 per cent of the current standard lifetime allowance of £1.25 million. So the scheme administrator identifies a potential chargeable amount of £125,000 that may be subject to a lifetime allowance charge.

Alan has the option of taking any chargeable amount entirely as a lifetime allowance excess lump sum. The gross lifetime allowance excess lump sum would be £125,000, but this gross payment is subject to a 55 per cent lifetime allowance charge. Alan decides to take this option.

The scheme administrator pays out a scheme pension of £9,375 and a pension commencement lump sum of £62,500 (being 25 per cent of the £250,000 available lifetime allowance).

This lump sum payment and pension entitlement takes Alan up to his lifetime allowance, crystallising the £250,000 lifetime allowance he has available at that point.

The scheme administrator also pays Alan a net lifetime allowance excess lump sum of £56,250, deducting the lifetime allowance charge due (of £68,750) from the gross amount of £125,000 before making the payment.

Scheme B: what the administrator does after the BCE

The scheme administrator of scheme B pays and accounts for the due tax to HMRC within 45 days of the next quarterly accounting point (31 December 2014) on the Pension Schemes Online Service, completing the Accounting for Tax (AFT) return.

Within 3 months of the BCE, the scheme administrator also provides Alan with a notice giving details of the level of lifetime allowance charge they deducted from the chargeable amount, how they calculated this and confirming when they accounted for the due tax to HMRC. Alan can use this to complete his Self Assessment return.

The scheme administrator of scheme B also sends out a statement to Alan confirming the amount that he has crystallised under the scheme and the percentage of standard lifetime allowance that this amount represents. In subsequent tax years (up to and including the tax year following that in which Alan reaches age 75) the scheme administrator also sends Alan an annual statement saying he has used up 30 per cent of the standard lifetime allowance under scheme B.

No event report to HMRC is required.