The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: each of the benefit crystallisation events (BCEs) in detail: BCE 6 relevant lump sums
Section 216(1)- BCE 6 and paragraphs 15 and 15A Schedule 32 Finance Act 2004
Paragraph 42 Schedule 10 Finance Act 2005
See PTM088100 for an overview of the benefit crystallisation events (BCEs) and the lifetime allowance.
What are relevant lump sums
A lifetime allowance test is triggered through BCE 6 whenever a member becomes entitled under a registered pension scheme to a ‘relevant lump sum’. The legislation provides that the following are relevant lump sums:
- a pension commencement lump sum paid before age 75, when uncrystallised benefits are drawn under an arrangement - see PTM063200
- a serious ill-health lump sum paid before age 75, where the individual falls into serious ill health - see PTM063400
- an uncrystallised funds pension lump sum - see PTM063300, or
- a lifetime allowance excess lump sum paid before age 75, where a chargeable amount has been identified because the individual’s lifetime allowance has been fully used up - see PTM084000
The effective date of a BCE 6
Payment of a pension commencement lump sum
Section 166(2)(a) Finance Act 2004
A pension commencement lump sum may only be paid where an entitlement to certain pension benefits arises. This is the time a scheme pension, lifetime annuity or income withdrawal entitlement first arises under a registered pension scheme, where derived from uncrystallised funds, or their equivalent in a defined benefits arrangement. An exception to this rule is where an individual is being paid a scheme specific protected pension commencement lump sum. Where the conditions at PTM063130 are met a special type of trivial commutation lump sum may be paid instead of a pension.
The date BCE 6 is triggered will be the date the actual entitlement to the linked pension benefit or special type of trivial lump sum arises. PTM061100 and PTM061200 describe pension and lump sum entitlement in more detail.
There is no BCE 6 where a pension commencement lump sum is paid in relation to a money purchase arrangement after 6 April 2011, and the individual becomes entitled to it before reaching the age of 75 but it is not paid to them until after they have reached age 75 - see PTM088200.
Leaving aside cases where the member might die before their pension entitlement can be established, entitlement to their pension commencement lump sum is deemed to arise immediately before their entitlement to the connected pension benefit (or trivial lump sum as per PTM063130 arises, whether the lump sum is actually paid at that time or at some other point within the acceptable time window. This means the lump sum will crystallise before the crystallisation of the connected pension benefit (so BCE 6 will be immediately before the connected BCE 1, BCE 2 or BCE 4, as appropriate).
The reason for this is to ensure that a pension commencement lump sum entitlement can be paid where the member is near their lifetime allowance limit, albeit possibly at a reduced rate due to the level of available portion of the member’s lump sum amount. If the crystallisation of the pension commencement lump sum through BCE 6 took place after the crystallisation of the linked pension benefit (through BCE 1, 2 or 4) there might be no available lifetime allowance left at all, meaning that no pension commencement lump sum could be paid.
PTM063240 explains the meaning of ‘available portion of the member’s lump sum amount’.
Other relevant lump sums
Section 166(2)(aa) and (b) Finance Act 2004
The effective date of BCE 6 for a serious ill-health lump sum or a lifetime allowance excess lump sum is the date the member obtains an actual right to the payment.
For an uncrystallised funds pension lump sum, it is immediately before the lump sum is paid.
Calculating the crystallised value of the relevant lump sum paid
The amount that crystallises through BCE 6 is the amount of relevant lump sum paid to the individual.
The scheme administrator compares this amount (and the capital value of any other benefits crystallised at that point) with the individual’s available lifetime allowance at that point.
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 6 will be the actual amount of relevant lump sum paid, i.e. after any deduction made by the scheme administrator to cover any lifetime allowance charge due. The chargeable amount will be what crystallises, i.e. after any deduction by the scheme administrator through BCE 6 (and any other BCE), over and above the individual’s available lifetime allowance, plus the charge paid by the scheme administrator. PTM085000 explains why this is and gives more detail.
Teng has already used 80 per cent of the standard lifetime allowance and has statements to this effect. He is not entitled to an enhanced lifetime allowance and does not have fixed protection so he has an available lifetime allowance of 20 per cent of the standard lifetime allowance.
He is accruing rights to pension benefits in respect of his current employment under an occupational pension scheme. When aged 64 and before Teng has drawn his benefits from his latest employer’s scheme he becomes seriously ill. His scheme administrator allows him to commute his pension entitlement under the scheme as a serious ill-health lump sum.
A lifetime allowance test is triggered through BCE 6 at the time Teng becomes entitled to the lump sum. The lump sum paid is £150,000. The lifetime allowance at that time is £1.5 million. This payment represents 10 per cent of the standard lifetime allowance. Teng has now used 90 per cent of his allowance.
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.