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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: each of the benefit crystallisation events (BCEs) in detail: BCE 1 designation of funds for drawdown pension during the member's lifetime

Glossary PTM000001
   

 

Introduction
When the BCE1 event is triggered
Calculating the capital value of the crystallising drawdown pension
Prevention of overlap where drawdown pension fund or flexi-access drawdown fund is used to purchase a lifetime annuity and/or a related dependants/nominees’ annuity or provide a scheme pension
Further lifetime allowance test at age 75

Introduction

Section 216(1) - BCE1 Finance Act 2004

See PTM088100 for an overview of the benefit crystallisation events (BCEs) and the lifetime allowance.

Types of drawdown pension

There are a number of different forms of drawdown pension. From 6 April 2015 capped drawdown pension and flexible drawdown pension rules changed with the introduction of the flexi-access drawdown pension. For explanations of the different types, see PTM062510.

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When the BCE1 event is triggered

Section 216(1) – BCE 1 Finance Act 2004

Paragraphs 3 and 4 Schedule 32 Finance Act 2004

A BCE 1 can only occur in a money purchase arrangement, as a defined benefit arrangement cannot provide a drawdown pension (‘pension rule 4’, section 165 Finance Act 2004).

Whenever a member designates that sums or assets held in a money purchase arrangement should be made available to provide a drawdown pension, a lifetime allowance test is triggered through BCE 1.

This happens whenever funds are first designated under an arrangement as being available to provide a drawdown pension. It also happens at any later date whenever all or part of any uncrystallised funds still held in that arrangement are designated for drawdown.

For the avoidance of doubt a test will not be triggered where a review of capped drawdown pension limits takes place at the three year review point or a pension sharing event occurs - see PTM062540. It is only where new, uncrystallised funds are introduced to the capped drawdown pension fund or flexi-access drawdown fund that a test will be triggered through BCE 1.  Where a BCE 4, BCE 2, is triggered due to an annuity purchase or provision of a scheme pension wholly or partly funded by drawdown pension funds there are rules to ensure that credit is given for any earlier amount crystallising through BCE 1 when calculating the amount crystallising through BCE 4 or BCE 2 (see below).

 

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Calculating the capital value of the crystallising drawdown pension

The value crystallising at BCE 1 is the sums and market value of the assets that are designated for drawdown in accordance with section 272 of the Taxation of Chargeable Gains Act 1992 and sections 278(2) to (4) of Finance Act 2004 (where dealing with a right or interest in respect of money lent directly or indirectly to certain parties).

Where a chargeable amount arises, any lifetime allowance charge paid by the scheme administrator effectively forms part of that chargeable amount. The amount crystallising through BCE 1 will be the actual amount designated to provide a drawdown pension, net of any deduction made by the scheme administrator to cover any lifetime allowance charge due. The chargeable amount will be what crystallises (net) through BCE 1 (and any other BCE), over and above the member’s available lifetime allowance, plus the charge paid by the scheme administrator. PTM085000 explains why this is and gives more detail. There’s also an example of the amount crystallising on designation of sums or assets for drawdown pension (including a later BCE 5B).

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Prevention of overlap where drawdown pension fund or flexi-access drawdown fund is used to purchase a lifetime annuity and/or a related dependants/nominees’ annuity or provide a scheme pension

Paragraphs 3 and 4 Schedule 32 Finance Act 2004

Paragraph 25(2) Schedule 10 Finance Act 2005

Where all or part of a drawdown pension fund or flexi-access drawdown fund is used to purchase a lifetime annuity contract and/or a related dependants/nominees’ annuity contract or is applied to provide a scheme pension, a BCE 2 (scheme pension) or BCE 4 (lifetime annuity etc.) is triggered in the same way as it would if uncrystallised funds were used or applied in this way.

As the funds used to secure that benefit payment have already been tested for lifetime allowance purposes at the point they were originally designated for drawdown pension, the legislation makes allowance for this when calculating the amount crystallising for lifetime allowance purposes at the later BCE.

This is referred to in the legislation as ‘prevention of overlap’ and is explained in PTM088620 and PTM088640.

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Further lifetime allowance test at age 75

A further lifetime allowance test (a BCE 5A) is carried out when the member reaches age 75, if they still have funds available for drawdown at that point. The amount that is tested against the aggregate of the sums and market value of the assets in the member’s drawdown fund and/or flexi-access drawdown fund under the arrangement less the amount(s) crystallised by the original BCE 1(s) in relation to that arrangement.