The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: each of the benefit crystallisation events (BCEs) in detail: BCE 5C and BCE 5D relevant unused uncrystallised funds applied for drawdown or annuity following a death
Relevant unused uncrystallised funds at death before age 75
Section 216(1) - BCE5C and BCE 5D, and sections 217, 218 (5E) to (5I) and 219 Finance Act 2004
Paragraph 27E(4) and (5) Schedule 28 and paragraphs 1, 14B and 14C Schedule 32 Finance Act 2004
Schedule 2 Taxation of Pensions Act 2014
See PTM088100 for an overview of the benefit crystallisation events (BCEs) and the lifetime allowance.
Designation for drawdown
Any unused uncrystallised funds (see below) designated into a dependant’s or a nominee’s flexi-access drawdown fund on or after 6 April 2015 are tested against the member’s lifetime allowance as a BCE 5C if:
- the member was under the age of 75 when they died and
- the funds are designated within the relevant two-year period (see below).
These are known as relevant unused uncrystallised funds
The amount that is tested against the member’s lifetime allowance is the total of the sums and market value of the assets designated as available for drawdown.
Purchase of annuity
From 6 April 2015, any entitlement to a dependants’ or a nominees’ annuity purchased using unused uncrystallised funds (see below) is tested against the member’s lifetime allowance as a BCE 5D if:
- the member was under the age of 75 when they died,
- they died on or after 3 December 2014 and
- the beneficiary’s entitlement to the annuity arose within the relevant two-year period (see below).
These are known as relevant unused uncrystallised funds.
The amount that is tested against the member’s lifetime allowance is the amount of the relevant unused uncrystallised funds used to purchase the annuity.
Unused uncrystallised funds
Unused uncrystallised funds are described in PTM072430 under ‘Taxation of a beneficiary’s flexi-access drawdown pension’, but reading references to ‘member’ as references to the individual.
Responsibility for ascertaining the lifetime allowance charge
The responsibility for carrying out the lifetime allowance test lies with the member’s personal representatives, rather than the scheme administrator.
See PTM088400 for the process that all parties are obliged to follow in testing the lifetime allowance.
The person liable to any lifetime allowance charge arising as a result of new BCE 5C or BCE 5D, will be the dependant or nominee as appropriate. That is, the charge will be the sole liability of the recipient of the flexi-access drawdown pension or annuity.
The effective date of the BCE 5C is the date of designation - see PTM088200.
The effective date of the BCE 5D is the date the dependant or nominee becomes entitled to the annuity. The meaning of ‘becoming entitled’ is explained at PTM088200.
Unlike the BCEs which occur whilst the member is alive, there are different procedures followed when dealing with BCE 5C and BCE 5D (or BCE 7). Accountability for any lifetime allowance charge due takes place once the payments have been made, that is once the level of payment is known. So the scheme administrator will not be deducting any lifetime allowance charge due from the payment.
BCE 5C and BCE 5D are ‘relevant post-death BCEs’. Where there is more than one relevant post-death BCE (say BCE 5C and BCE 7, or two BCE 5Ds) in respect of the member, the BCEs are to be treated as occurring immediately before the member’s death, but after the entitlement to any pension commencement lump sum. This is the case even though the death benefits giving rise to the BCEs will be paid after the member’s death, probably at different times. This treatment is purely for the purposes of calculating the availability of the deceased’s lifetime allowance, to ensure that any liability arising following the BCEs is proportioned equitably between the various recipients.
The relevant two-year period
The relevant two-year period for the purposes of these BCEs is the period starting on the date on which the scheme administrator first knew of the member’s death or, if earlier, the day when they could first reasonably have been expected to know of it.
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.