PTM113255 - International: UK tax charges on non-UK schemes: the member payment charges and taxable property charges: crystallisation events that will reduce a member's UK funds from 6 April 2017

Throughout this page of guidance the phrase ‘UK funds’ means a:

  • UK tax-relieved fund,
  • relevant transfer fund,
  • ring-fenced transfer fund, or
  • a combination of more than one of those funds.

For guidance on the definition of these types of fund go to PTM113230.

Overview of crystallisation events reduce the member’s UK funds
Drawdown pension
Scheme pension
Dependants’ or nominees’ drawdown pension
Dependants’ scheme pension

Overview of crystallisation events reduce the member’s UK funds

Regulation 4ZA(3)(b) The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207

Certain crystallisation events relating to drawdown pension and scheme pension will reduce a member’s UK funds.  For these types of pension, some or all of the member’s funds under the scheme are ‘earmarked’ to provide a pension from the scheme.  As the member’s funds are still held under the scheme until the pension is paid the member’s funds would not normally be reduced.  By allowing a deduction when benefits are crystallised, this allows members to use/earmark their UK funds to provide an authorised pension and then use the non-UK funds to pay benefits in accordance with the law of the country under which the relevant non-UK scheme (RNUKS) is established.

However, because the individual is effectively getting a deduction ‘up front’, certain payments and events trigger a ‘reverse depletion’ of the member’s funds.  Go to PTM113265 for guidance on when and how reverse depletion occurs.

Regulation 4ZD(8) The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006- SI 2006/207

The reduction of the member’s UK funds due to a crystallisation event does not apply for the purpose of the temporary non-residence rules.

PTM113260 provides guidance on the order in which a member’s UK funds will be reduced by a crystallisation event.

PTM113270 gives examples of how a crystallisation event will reduce a member’s UK funds.

Drawdown pension

Regulations 4ZA(3)(b)(i) and 4ZB(5) The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207

A member’s UK funds may be reduced where, on or after 6 April 2017, they designate sums or assets as available for the payment of drawdown pension (see PTM062700).  A reduction of the member’s UK funds is available only if the member has reached normal minimum pension age or the member is retiring due to ill-health (see PTM062100).  

The member’s UK funds are reduced at the point the member designates funds as available to pay drawdown pension.  The amount of the reduction is the total of the amount of the sums and the market value of the assets designated as available to pay drawdown pension.

There will be no reduction of the member’s UK funds if they designate funds before reaching normal minimum pension age and do not satisfy the ill-health condition.

Scheme pension

Regulations 4ZA(3)(b)(iii) and 4ZB(7) The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207

A member’s UK funds may be reduced where, on or after 6 April 2017, a member who has reached normal minimum pension age or is retiring due to ill-health (see PTM062100) becomes entitled to a scheme pension (see PTM062300).  The reduction is made on the date of payment of the first instalment of scheme pension.  The amount of the reduction is:

20 x P

Where P is the amount of pension that will be payable to the member in the 12 months beginning with date of entitlement.  It is to be assumed that the pension continues to be payable throughout those 12 months at the rate at which it is payable when the member first becomes entitled to the scheme pension.

For example, if a member becomes entitled to a scheme pension of £10,000 per annum, the amount that reduces the member’s UK funds is £200,000 (20 x £10,000).

If entitlement to the scheme pension arises before the member reaches normal minimum pension age and they do not satisfy the ill-health condition, there will be no reduction of the member’s UK funds.

Dependants’ or nominees’ drawdown pension

Regulations 4ZA(3)(b)(ii) and 4ZB(6) The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207

The designation of the member’s funds as available for the payment of either dependants’ drawdown pension or nominees’ drawdown pension following the member’s death (see PTM072410) may also reduce the member’s UK funds.  The member’s UK funds will be reduced if the designation occurs on or after 6 April 2017 and the reduction occurs when the sums or assets are designated.

The amount by which the member’s funds are reduced depends on the nature of the funds being designated.  The amount of the deduction is the total of the amount of the sums and the market value of the assets designated to provide dependants’ or nominees’ drawdown pension that are ‘unused uncrystallised funds’.  Paragraph 27E(4) and (5) of Schedule 28 Finance Act 2004 gives the meaning of ‘unused uncrystallised funds’ – see PTM072430.

Dependants’ scheme pension

Regulations 4ZA(3)(b)(iv) and 4ZB(8) to (10) The Pensions Schemes (Application of UK Provisions to Relevant Non-UK Schemes) Regulations 2006 - SI 2006/207

A member’s UK funds may be reduced where following the member’s death an individual becomes entitled to a dependants’ scheme pension (see PTM072110) on or after 6 April 2017.  The reduction will occur on the date that the individual becomes entitled to a dependants’ scheme pension.

The member’s UK fund will be reduced broadly where the dependant’s scheme pension is provided from uncrystallised rights.

The amount of the reduction is the total of the amount of the sums and market value of the assets applied in connection with the purchase or provision of the dependants’ scheme pension, provided that it is not related to the member’s scheme pension.  A dependants’ scheme pension is connected to a member’s scheme pension if:

  • the day on which one is purchased, or sums or assets are applied for its provision, is no earlier than seven days before, and no later than seven days after, the day on which the other is purchased or sums or assets are applied for its provision, and
  • the dependants' scheme pension will be payable to a dependant of the member.

However this amount will be reduced where part or all of the dependants’ scheme pension is funded from a:

  • member’s drawdown pension fund
  • member’s flexi-access drawdown fund
  • dependants’ drawdown pension fund or
  • dependants’ flexi-access drawdown fund.

The total of the amount of the sums and market value of the assets derived from those types of fund will be deducted from the amount used to purchase or provide the dependants’ scheme pension.

Example

Tom was a member of a QROPS and following his death the scheme manager uses £450,000 to provide a dependants’ scheme pension for Tom’s widow, Samantha.  Before he died the only pension Tom received from the scheme was drawdown pension.  This means Samantha’s dependants’ scheme pension cannot be related to a scheme pension in respect of Tom (as he wasn’t getting scheme pension).

Part of Samantha’s dependants’ scheme pension was funded from the £400,000 remaining in Tom’s flexi-access drawdown fund.  This amount (£400,000) is deducted from the £450,000 applied by the scheme to provide Samantha’s dependants’ scheme pension.

The amount by which Tom’s UK funds is reduced is £50,000 (£450,000 – £400,000).