PTM088650 - The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: each of the benefit crystallisation events (BCEs) in detail: BCE 5, 5A and 5B age 75

Glossary PTM000001

Testing against the lifetime allowance at age 75
BCE 5: age 75 without taking all entitlements under a defined benefits arrangement
Calculating the amount crystallising through BCE 5
BCE 5A: age 75 having previously designated funds as drawdown pension
BCE 5B: age 75 money purchase arrangement without any or only some funds designated as drawdown pension
BCE 5 or BCE 5B: age 75 without taking entitlement under a hybrid arrangement
Where the BCE occurs after repayment of the overseas transfer charge
Age 75 but member cannot be contacted or is untraceable

As of the 6 April 2023 there is no longer a lifetime allowance (LTA) charge. However, for the 2023-24 tax year the concept of lifetime allowance remains, and benefits crystallising still need to be measured against the lifetime allowance.

Relevant lump sums will no longer be subject to an LTA charge but instead there will be a charge to income tax at the individual’s marginal rate.

You can read more about the changes at PTM901100.

For any event that occurs before the 6 April 2023 the below guidance should still be followed and any LTA charges that arise will still apply.

Testing against the lifetime allowance at age 75

Sections 216(1) - BCE 5, 5A, 5B, and 277(a) Finance Act 2004

Paragraph 2 Schedule 32 Finance Act 2004

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

The only BCE that can be triggered after an individual’s 75th birthday is where a scheme pension in payment is increased beyond the permitted margin (BCE 3).

Benefits held in a registered pension scheme in respect of a scheme member will always have been tested against that member’s lifetime allowance by their 75th birthday, whether or not those benefits have been drawn by that point. If benefits have not been drawn by the member’s 75th birthday they are valued and tested for lifetime allowance purposes at that point by reference to one of the following types of BCE.

BCE 5

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

BCE 5A

Where a member reaches age 75 with a drawdown pension fund or flexi-access drawdown fund.

BCE 5B

Where a member reaches 75 under a money purchase arrangement, in which there are remaining unused funds.

Top of page

BCE 5: age 75 without taking all entitlements under a defined benefits arrangement

Paragraph 14 Schedule 32 Finance Act 2004

There is nothing in the tax legislation requiring benefits to come into payment when the member reaches age 75. The tax legislation imposes a lifetime allowance test on these uncrystallised entitlements at the member’s 75th birthday, whether or not the scheme pension and lump sum entitlements come into payment at that time.

This BCE 5 test measures the level of benefits that would come into payment at that time, if drawn.

In practice defined benefits schemes may well insist that benefits come into payment before the member reaches age 75, for example at a set date or on their retirement from the employment. BCE 5 ensures that where this does not happen, all member benefits in existence at that point are nonetheless tested for lifetime allowance purposes.

As no BCE other than BCE 3 (PTM088630) can occur after age 75 , benefits paid to or in respect of the member after that date are not tested against the lifetime allowance. However, they will already have been tested on the member’s 75th birthday under BCE 5.

Top of page

Calculating the amount crystallising through BCE 5

Paragraphs 6 and 14 Schedule 32 Finance Act 2004

Paragraph 43(8) Schedule 10 Finance Act 2005

The amount crystallising for lifetime allowance purposes under BCE 5 is calculated by reference to the level of benefits the member would become entitled to on their 75th birthday if benefits were paid under the defined benefits arrangement at that point.

BCE 5 only covers defined benefits arrangements and a prospective entitlement to a scheme pension and (in some cases) a separate, stand-alone entitlement to a lump sum benefit. The crystallised value of the potential scheme pension entitlement payable is calculated by multiplying the annual level of pension the member would become entitled to on their birthday by the standard relevant valuation factor (RVF) of 20, or another higher non-standard RVF where agreed with HMRC - see PTM088620

The value of the prospective lump sum payment is the amount of the lump sum that would be paid on that date.

If the member only has the option of drawing a lump sum at the expense of part of their pension benefit, that is, by commutation, the lump sum element can be ignored, as the figure taken into account for the pension will include the lump sum element. In the legislation all the above is represented by the following formula:

(RVF x DP) + DSLS

RVF = 20, unless a non-standard RVF has been agreed with HMRC.

DP = the annual rate of scheme pension which the member would be entitled to if, on the date on which they reach 75, the member acquired an actual right to receive it. This is what scheme pension would be payable to the member assuming entitlement arose on reaching 75.

DSLS = the amount of any lump sum (not provided by commutation of pension) which the member would be entitled to if, on that date, they acquired an actual right to receive it. This is the amount of lump sum that would be payable to the member if a lump sum was drawn on reaching 75.

The 2 examples under the heading below illustrate this.

Reduction of scheme pension entitlement to cover lifetime allowance charge liability

Paragraph 14(1A) Schedule 32 Finance Act 2004

Paragraph 43(7) Schedule 10 Finance Act 2005

If the member does not have sufficient available lifetime allowance to cover the amount crystallising through BCE 5 the scheme administrator may reduce the individual’s prospective pension entitlement under the scheme/arrangement in order to cover the lifetime allowance charge due on the chargeable amount arising at that BCE.

This potential reduction is ignored when calculating DP. DP is based on the full prospective entitlement under the scheme before any reduction.

Where either the pension entitlement from the scheme is not reduced, or the reduction does not reasonably reflect the tax charge paid by the scheme administrator, based on normal actuarial practice, the tax charge paid by the scheme administrator is added to the chargeable amount arising. It becomes what is called a scheme-funded tax payment. PTM085000 explains this in more detail.

Example 1

Martin is a member of an occupational pension scheme that provides defined benefits. The scheme provides him with a scheme pension and a separate lump sum set by reference to his service and final earnings when he retires.

Martin is 75 on 8 October 2013. Martin is entitled under the scheme rules to draw his benefits at that time, but instead he decides to defer payment for a few years.

On Martin’s 75th birthday the scheme administrator has to carry out a lifetime allowance test (as BCE 5 has occurred). The scheme administrator calculates what benefits Martin would be entitled to if he drew benefits at that date.

Martin had 20 years’ service with the company and was earning £30,000 per annum at that point. This would entitle him to a scheme pension of £10,000 per annum and a separate lump sum of £20,000.

The amount crystallised is calculated at £220,000, or 14.66% of the standard lifetime allowance for that tax year (£1.5 million for 2013-14).

This is arrived at by multiplying the annual rate of pension that would be paid at that date (£10,000) by a factor of 20 (the standard RVF) to arrive at a capital value of £200,000, and then adding on the £20,000 prospective lump sum payment.

Example 2

As in the above example, but Martin has no separate lump sum entitlement. He would only be able to draw a lump sum under the scheme if he commuted part of his £10,000 pension.

The scheme administrator can ignore any prospective lump sum payment. The amount crystallising is only £200,000 (20 x the £10,000 pension) using up 13.33% of his lifetime allowance.

Top of page

BCE 5A: age 75 having previously designated funds as drawdown pension

It may happen that a member has earlier designated funds as available to provide a drawdown pension or flexi-access drawdown pension and reaches age 75:

  • without either having taken a lifetime annuity (in which case BCE 4 would have occurred)
  • without having taken a scheme pension (in which case BCE 2 would have occurred)
  • when a lifetime annuity or scheme pension has been taken, but only by application of part of the drawdown pension fund or flexi-access drawdown fund - so, part of the drawdown pension fund or flexi-access drawdown fund is still in place when the member reaches age 75.

Taking the examples for Andy in PTM088640 - if Andy did not purchase a lifetime annuity, so BCE 4 did not actually occur, but instead he reaches age 75 at that point, then the amounts crystallised will be the same as described in those examples.

It can be seen therefore that BCE 5A merely performs the same function of a further lifetime allowance test as occurs when a lifetime annuity or a scheme pension arises from a drawdown pension fund or flexi-access drawdown fund. And the prevention of overlap rules apply to ensure that it is only net growth (investment growth less payments of income made) in the drawdown pension fund or flexi-access drawdown fund remaining since the original designation or designations that is tested.

The amount to be reduced under BCE 1 for the purpose of BCE 5A is the amount originally designated as available for drawdown pension but which has not since been applied as a lifetime annuity or scheme pension. So, for example, if the original amount designated was £100,000, and £75,000 had been applied towards a lifetime annuity, an LTA test is triggered through BCE 5A on the amount that has not previously been tested against the LTA including any growth (in this case previously against £75,000 through BCE 4) which in this case is on the remaining £25,000.

Where the entitlement to the drawdown pension arose before 6 April 2006

Articles 29 and 29A The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

There will be no BCE 5A in respect of a drawdown pension fund or flexi-access drawdown fund that represents unsecured pension in payment on 5 April 2006 - see PTM088300.

Top of page

BCE 5B: age 75 money purchase arrangement without any or only some funds designated as drawdown pension

BCE 5B occurs where a member reaches age 75 and has remaining unused funds in the arrangement. The amount of the remaining unused funds when the member reaches age 75 is the amount crystallising for the purposes of BCE 5B.

What constitutes remaining unused funds depends on whether or not the arrangement is a cash balance arrangement.

For ‘an other money purchase arrangement’ remaining unused funds is the amount of sums and assets held for the purposes of the arrangement which have not been designated by the member as available for the payment of drawdown pension, and which have not been used to provide a scheme pension or a dependants’ scheme pension.

In a cash balance arrangement, the actual level of the uncrystallised funds counting as remaining unused funds held in that arrangement at age 75 will not necessarily reflect the true value of the undrawn rights the member is entitled to under the arrangement at that time.

The legislation prescribes a specific method to calculate the level of uncrystallised funds held in a cash balance arrangement immediately before the member reaches age 75 and for the purpose of the amount crystallising through BCE 5B as remaining unused funds. The legislation does this in the same way that accrual under a cash balance arrangement is valued for annual allowance purposes, for more on this see PTM053400.

The value of the remaining unused funds is taken as being the amount that would be made available to provide the member with benefits at that time if the member became entitled to benefits under the arrangement on reaching age 75. So, it is not the funds actually held in the cash balance arrangement at that time, but the funds that would be there if the member decided to draw benefits on that date (ignoring any potential reduction that may be applied by the scheme, based on the member’s age).

Example of the crystallisation of remaining unused funds through BCE 5B

Sylvia has £300,000 held in a money purchase arrangement. On her 70th birthday on 6 October 2006 she decides to draw benefits from half the funds held in her arrangement. Sylvia takes a pension commencement lump sum of £37,500 and uses the remaining funds to generate an unsecured pension through income withdrawal.

The payment of the lump sum and the designation of funds to provide an unsecured pension are 2 BCEs (BCE 6 and BCE 1 respectively) and so trigger a lifetime allowance test.

The scheme administrator calculates the capital value of the benefits crystallised as £150,000. This is based on the actual lump sum to be paid (£37,500) and the market value of the assets representing the unsecured pension fund, as designated by Sylvia.

The scheme administrator also calculates the maximum unsecured pension that may be paid from the unsecured pension fund based on value of that fund. This limit applies for the following 5 pension years following on from 6 October 2006.

On 6 April 2007 Sylvia decides to secure her maximum annual unsecured pension by purchasing a short-term annuity contract. As no new uncrystallised funds have been drawn or brought into the unsecured pension fund there is no review of limits or a lifetime allowance test.

On 6 April 2011, her unsecured pension is renamed and becomes a drawdown pension. There is no change to the maximum drawdown pension limit calculation or to the pension years and dates. Sylvia uses £100,000 of her remaining uncrystallised funds. She takes a pension commencement lump sum of £25,000 and uses the remaining £75,000 to increase her drawdown pension fund and generate a higher drawdown pension.

A review of the drawdown pension limit is triggered but there is no change to the pension years and dates. A lifetime allowance test is also triggered through BCE 1 by the additional designation of funds and BCE 6 by the payment of the lump sum.

Sylvia is 75 on 6 October 2011. She still has uncrystallised funds of £70,000 held in the arrangement. On her 75th birthday those uncrystallised funds are remaining unused funds. The £70,000 remaining unused funds are tested against Sylvia’s lifetime allowance on her 75th birthday as a BCE 5B. As BCE 5B has occurred a lifetime allowance test is carried out by the scheme administrator. For the avoidance of doubt, the £70,000 remains available to pay benefits but has crystallised for lifetime allowance purposes.

Example of how the level of uncrystallised funds are calculated under a cash balance arrangement at age 75

Tony reaches age 75 on 1 November 2011. He holds rights under a cash balance arrangement under an occupational pension scheme. He has not drawn any rights from that arrangement before.

The value of uncrystallised funds treated as remaining unused funds at that time (and hence crystallising through BCE 5B) is the sum that would be made available to provide Tony with benefits under the arrangement at age 75 if Tony drew all his benefit entitlements at that time.

Under the terms of the scheme rules Tony becomes entitled to a cash balance benefit equivalent to £5,000 for every year he has worked for the sponsoring employer when he retires. Tony has worked for the sponsoring employer for 25 years. So, if Tony took benefits on his 75th birthday he would have funds of £125,000 (25 x £5,000) made available under the arrangement to provide him with benefits. Tony could then choose how he wanted to use that £125,000, within the money purchase options open to him (buy a lifetime annuity, take a drawdown pension, etc.).

The remaining unused funds crystallising through BCE 5B on his 75th birthday are therefore taken as being worth £125,000, as this is the amount that would be available under the arrangement if he took all his benefit entitlements at that time. So, £125,000 crystallises through BCE 5B at that time.

Top of page

BCE 5 or BCE 5B: age 75 without taking entitlement under a hybrid arrangement

Section 152 Finance Act 2004

Paragraph 5 Schedule 32 and paragraph 8(2) Schedule 28 Finance Act 2004 Paragraph 25(3) Schedule 10 Finance Act 2005

A hybrid arrangement may potentially provide benefits on either a defined benefits or money purchase/cash balance basis. When benefits actually come into payment the hybrid arrangement is then treated on the basis of whatever form benefits finally take.

Where a member of a hybrid arrangement reaches their 75th birthday with uncrystallised rights in a hybrid arrangement, those benefits must be tested for lifetime allowance purposes.

Because they could potentially be provided on either a money purchase or defined benefits basis, for the purpose of the lifetime allowance test, the crystallised value of those benefits is calculated both ways, with the higher of those 2 amounts being taken to be the amount crystallising at that point.

Where the hybrid arrangement contains no defined benefits element, providing benefits either on a cash balance or other money purchase basis, the hybrid arrangement will also meet the definition of a money purchase arrangement, so any uncrystallised funds remaining immediately before they reach age 75 would represent the remaining unused funds, and tested through BCE 5B.

Where the hybrid arrangement may provide defined benefits the scheme administrator needs to carry out 2 calculations:

  • a calculation assuming the arrangement will provide benefits wholly on a money purchase basis, with all uncrystallised funds being remaining unused funds - this would test and value the remaining unused funds through BCE 5B
  • a calculation valuing undrawn benefits in the same way through BCE 5, see the calculation above under the section Calculating the amount crystallising through BCE 5.

It is the higher of the 2 values that is the amount that crystallises at age 75 under the arrangement.

Example

Stephen is accruing benefits under a registered pension scheme on a money purchase basis. The scheme also guarantees that if the monies accrued do not provide a benefit equivalent to n/80ths of his final salary from his employer for every year he has worked for them, they will pay such a benefit direct from the scheme (in exchange for the accrued fund). This would give Stephen an entitlement to a set level of scheme pension under the scheme, part of which can be given up, commuted, to provide a lump sum.

So, Stephen’s arrangement is actually a hybrid arrangement under which benefits may ultimately be provided on either a money purchase or defined benefits basis.

Stephen decides that he does not want to draw benefits at his 75th birthday as he is still working and he will retain the right to a pension commencement lump sum.

As Stephen reaches his 75th birthday the scheme administrator calculates the amount that would crystallise at that point if benefits were provided on either the defined benefits or money purchase basis.

They firstly calculate the amount that would crystallise through BCE 5B on the basis that the money purchase route was taken. This is the amount of the remaining unused funds in the arrangement. The effective point of valuation is Stephen’s 75th birthday. The market value of those funds is £500,000 at that point. So, the amount that would crystallise through BCE 5B is £500,000.

The scheme administrator then calculates what benefits would crystallise through BCE 5 if the defined benefits promise provided by the scheme was taken at that time. The scheme pension that would be provided would be £20,000 per annum. As any lump sum would be generated by commuting part of that pension, the scheme administrator can ignore this entitlement. The amount that would crystallise under this option is therefore £400,000 (20 X £20,000).

The amount crystallised for lifetime allowance purposes is therefore taken as £500,000 (the higher of the 2 figures).

Stephen is 75 in the 2011-12 tax year when the standard lifetime allowance is £1.8 million. So Stephen has crystallised 27.77% of the standard lifetime allowance.

Top of page

Where the BCE occurs after repayment of the overseas transfer charge

Paragraph 2A Schedule 32 Finance Act 2004

An individual may make a recognised transfer from a registered pension scheme to a qualifying recognised overseas pension scheme (QROPS) that is subject to the overseas transfer charge, but that tax charge subsequently becomes repayable. PTM102600 explains when this may occur.

Where HMRC repays the tax charge to a registered pension scheme administrator this amount must be used to provide benefits, or a transfer, in accordance with the scheme rules. If a BCE occurs under the scheme in respect of funds that represent the repaid overseas transfer charge, an adjustment can be made to account for the fact that those funds have previously been tested as a BCE 8.

Go to PTM102600 for guidance on how the amount crystallising is adjusted in these circumstances.

Age 75 but member cannot be contacted or is untraceable

It may be that a member has reached age 75, and as a result, a benefit crystallisation event (BCE) has occurred; this will be either:

  • a BCE 5 for prospective rights in defined benefit arrangements
  • a BCE 5A where the member has previously designated funds as available for the payment of a drawdown pension
  • a BCE 5B for uncrystallised rights (remaining unused funds) in money purchase arrangements.

Where the member is untraceable, or the scheme administrator has been unable to contact the member to obtain details of the available lifetime allowance (but not including the situation where a member can be contacted but fails to respond), the scheme administrator is entitled to make a commercial judgement based on the available information and the particular circumstances of the case as to whether a lifetime allowance charge should apply.

In the event of any subsequent discovery that a lifetime allowance charge was due but was not returned, HMRC would need to be satisfied that the judgement exercised by the scheme administrator was appropriate in the circumstances in order to operate the good faith discharge of tax liability - see PTM131000.