The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: each of the benefit crystallisation events (BCEs) in detail: BCE 7 relevant lump sum death benefits
Sections 206, 216(1) -BCE 7, 218(5C) to (5E) and 219(7) Finance Act 2004
Paragraphs 2 and 16 Schedule 32 Finance Act 2004
See PTM088100 for an overview of the benefit crystallisation events (BCEs) and the lifetime allowance.
What are relevant lump sum death benefits
A BCE 7 occurs when a member of a registered pension scheme dies and what the legislation calls a ‘relevant lump sum death benefit’ is paid in respect of that member. See PTM071000 for details of relevant lump sum death benefits.
This BCE still represents a test on the member’s available lifetime allowance, although:
- any lifetime allowance charge that arises is chargeable on the recipient of the payment
- the responsibility for carrying out the test lies on the member’s personal representatives, rather than the scheme administrator.
Lump sum death benefits covered
A relevant lump sum death benefit includes only two forms of lump sum death benefits:
- a defined benefits lump sum death benefit paid under a defined benefits arrangement paid before the end of the relevant two year period - see PTM073100, and
- an uncrystallised funds lump sum death benefit paid under an other money purchase arrangement or cash balance arrangement, and if paid on or after 6 April 2015, the lump sum is paid before the end of the relevant two year period - see PTM073200.
A BCE 7 can only occur if the member died before reaching age 75 because no BCE other than BCE 3 can occur after an individual has reached that age - see PTM088630. If a defined benefits lump sum death benefit or an uncrystallised funds lump sum death benefit is paid where the member dies on or after their 75th birthday, the lump sum itself is taxable. Lump sums paid before 6 April 2016 are subject to the special lump sum death benefits charge at a rate of 45 per cent (or 55 per cent if paid before 6 April 2015) - see PTM073100 or PTM073200 for more detail. For lump sums paid on or after 6 April 2016, see PTM073010.
Where death occurs before the member reaches age 75, and payment is within the two year period, the reason these two lump sum death benefit payments are tested against the deceased member’s lifetime allowance is because otherwise they may be paid tax-free from uncrystallised funds/rights that have not previously been tested for lifetime allowance purposes on the member.
The effective date of a BCE 7 and the amount crystallising
The effective date of BCE 7 is the date of payment of that lump sum death benefit. This is the case whether one or more relevant lump sum death benefits are paid following the death of the same individual, from one or more registered pension scheme.
BCE 7, along with BCE 5C and BCE 5D, is a ‘relevant post-death BCE’. Where more than one relevant post-death BCE occurs, then for the purposes of calculating the availability of the deceased’s lifetime allowance (and only for this purpose), the BCEs are all treated as occurring simultaneously, immediately before the death of the member. This is the case even though the actual lump sum death benefits giving rise to the BCEs will be paid after the member’s death, probably at different times. This is to ensure that any liability arising following the BCEs is apportioned equitably between the various recipients.
The BCE 7 occurs no matter who the lump sum is paid to.
PTM087000 gives an example.
Section 219(7) Finance Act 2004
Where a pension commencement lump sum was paid in anticipation of entitlement to a relevant pension (see PTM063200), but the member dies before the entitlement to the pension arises, the entitlement to the pension commencement lump sum will be regarded as arising immediately before the death of the member. This pension commencement lump sum will be a BCE6 and is tested against the lifetime allowance of the deceased member before any lump sum death benefits crystallising under BCE7 as above.
The amount that crystallises
The amount crystallising is the amount of the relevant lump sum death benefit the recipient (or recipients) receives.
Unlike the BCEs which occur whilst the member is alive, there are different procedures followed when dealing with BCE 7 (or BCE 5C or BCE 5D). 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 deduct any lifetime allowance charge due from the payment.
For an example see PTM088500
Section 219(7) Finance Act 2004
Article 20 of the Taxation of Pension Schemes (Transitional Provisions) Order - SI2006/572
For the avoidance of doubt where the first BCE that occurs after 5 April 2006 is BCE 7 any pension in payment before 6 April 2006 (a pre-commencement pension) must be taken into account when calculating the member’s available lifetime allowance - see PTM088300.
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.