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Benefit crystallisation events

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Phone icon Last updated 9 December 2020

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Overview

Everyone has a personal lifetime allowance and for most people it’s the standard lifetime allowance (LTA). The current LTA is £1,073,100 and this will increase in line with the Consumer Price Index (CPI) in future years. Some people may have a higher or lower LTA by virtue of, for example, one of the transitional protections that were put in place when the LTA was introduced.

UK Legislation specifies certain occasions when a scheme administrator must check whether the pension benefits arising (crystallising) at that point exceed a member’s available lifetime allowance. These occasions are known as Benefit Crystallisation Events (BCEs).
In this article
  • Types of BCEs
  • Testing the lifetime allowance at a BCE
  • Case study

Types of BCEs

A BCE will arise in each of the following circumstances.
Taking pensions
BCE 1  Where the funds are designated to provide the member with a drawdown pension
BCE 2  Where the member becomes entitled to a scheme pension whether from a defined benefit arrangement or a money purchase arrangement
BCE 3  Where a scheme pension in payment is increased beyond a permitted margin
BCE 4  Where a member becomes entitled to a Lifetime Annuity under a money purchase arrangement
Unused funds at age 75 or death
 BCE 5  Under a defined benefit arrangement, where a member reaches age 75 without drawing all or part of their entitlement to a scheme pension/lump sum
 BCE 5A  Where a member with a drawdown pension fund reaches age 75
BCE 5B  Where a member reaches age 75 in a money purchase scheme and there are remaining unused funds 
BCE 5C Where a member dies before age 75 and unused uncrystallised funds are designate to provide a dependants/nominees flexi access drawdown pension
BCE 5D  Where a member dies before age 75 and unused uncrystallised funds are designated to provide a dependants/nominees annuity
Lump sums
BCE 6  Where the member becomes entitled to a lump sum
Death
BCE 7  Where a relevant lump sum death benefit is paid on death of a member
Transfer to a Qualifying Recognised Overseas Pension Scheme
BCE 8  Where a member’s benefits are transferred to a qualifying recognised overseas pension scheme (QROPS)
Other
BCE 9  Relates to other types of payment, for example pension commencement lump sum (PCLS) type payments made after death, excessive PCLS payments, arrears of pension after death
A LTA test is triggered through BCE 6 when a relevant lump sum is paid. The current UK legislation provides that the following payment types are relevant lump sums:
  • a PCLS paid before age 75, when uncrystallised benefits are drawn under an arrangement
  • a Serious Ill-Health Lump Sum paid before age 75
  • an Uncrystallised Funds Pension Lump Sum, 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 
A BCE 7 occurs when a member of a registered pension scheme dies and a relevant lump sum death benefit is paid.  The following are relevant lump sum death benefits:
  • a defined benefit lump sum death benefit paid before the end of the relevant two-year period
  • an uncrystallised funds lump sum death benefit is paid before the end of the relevant two year period

Testing the lifetime allowance at a BCE

The scheme administrator must establish the capital value of the member’s pension savings that the BCE relates to.  This value is then compared to the individual’s LTA that is still available at the time of the BCE (if any). 

Where no benefits have previously crystallised since 6 April 2006 the BCE is tested against the member’s standard LTA. Where there has been a previous BCE then the amount being tested will be assessed against the remaining balance. 

A pension scheme benefit in payment from a pension scheme that started before 6 April 2006 is only taken into account for LTA purposes the first time a BCE occurs in respect of the member. When this happens the value of the pension in payment reduces the amount of LTA available for this BCE. If the value of the pre-commencement pension, as these are known, equals or exceeds the member’s lifetime allowance, the member has no available lifetime allowance at that first BCE. This means that the entire amount crystallising at that first BCE will represent a chargeable amount.

The amount crystallising at a BCE depends on the nature of the event concerned, the type of arrangement and the form of the benefits crystallising. Where a lifetime annuity contract is purchased, the crystallised value is the purchase price of that annuity. And where a lump sum is paid, it is simply the amount of lump sum paid. 

Where a scheme pension is being paid, a valuation factor (usually 20) needs to be applied to the annual pension coming into payment in order to arrive at a capital crystallised value. 
 

Case study

Client A
Client A has £600,000 in a Self Invested Pension (SIPP). On 6th April 2020 they decide to draw benefits from half of the funds held in the arrangement. They take a tax-free lump sum (PCLS) of £75,000 and crystallise the remaining funds (£225,000) into a flexible drawdown plan.The payment of the lump sum and designation of funds to drawdown are two BCEs (BCE6 and BCE1 respectively) and trigger an LTA test. The capital value of the crystallised benefits will, in this instance, be £300,000 and it is this amount that is tested against Client A’s LTA.

Client A confirms to the SIPP provider that they have not crystallised any other pension arrangements, do not have any pre April 2006 benefits in payment and as such has 100% of the LTA available. The SIPP administrator calculates that they have used up 27.95% of the LTA (£75,000 + £225,000 / £1,073,100) and will issue a certificate for that amount to Client A showing that they has 72.05% of the LTA remaining.

In June 2020 Client A uses £200,000 of the remaining uncrystallised funds. They take a further PCLS of £50,000 and use the remaining £150,000 to purchase an annuity. A LTA test is triggered through BCE 6 and in this instance BCE 4. They use up a further 18.63% of the LTA (£200,000/£1,073,100) so now have a remaining LTA of 53.42%.

Client A is 75 in August 2020. They still have uncrystallised funds of £100,000 held in the arrangement and their income drawdown pot is now worth £260,000. Both of these amounts are now subject to a further BCE. There are no post-age 75 BCE’s so all the remaining untested funds are subject to this BCE. The uncrystallised £100,000 fund is tested against their LTA under BCE5B using the face value of the plan so this BCE will use up 9.31% of the LTA (£100,000/£1,073,100). At the same time the drawdown fund is also tested but to prevent any overlap only the additional growth in the fund is tested. BCE5A tests the current drawdown fund value – in this case the fund has grown to £260,000 LESS the amount originally crystallised under BCE1. A further 3.26% will be utilised – (£260,000-£225,000)/£1,073,100.

Client A had a remaining LTA of 53.42%. BCE5B and BCE5A generate a further BCE statement showing that 12.57% of the LTA has been used at 75. As this is within their overall LTA, then no further accounting to HM Revenue & Customs (HMRC) is required.

Client B
In June 2020 Client B decides to draw benefits from his former employer’s defined benefit pension scheme. They will receive a scheme pension of £28,000 per annum and a separate PCLS entitlement of £84,000. As the scheme will pay them a scheme pension the benefits will be tested against the LTA using BCE6 for the PCLS and BCE2 for the pension.

The lump sum is tested against its face value and the pension will be tested by applying the x20 valuation factor. For this BCE Cleint B has used up 62.52% of the available LTA:

((20 x £28,000) + £84,000) / £1,073,100 = 60.01%.

Client B has 39.99% of the standard LTA remaining when they decide to take some further benefits from a SIPP. They crystallise into drawdown £300,000 of the plan the total value of which is £450,000. Through the application of BCE tests 5 and 1, they will use up a further 27.95% of his available LTA (£300,000 / £1,073,100 = 27.95%).

Following the two previous BCEs, Client B now has 12.04% of the LTA remaining when they decide to crystallise the remaining value of his SIPP - £150,000. As the LTA has not changed, this would represent 13.97% of the LTA which exceeds the available amount.

They are able to crystallise £129,201 using BCE6 for the available lump sum and BCE1 for the drawdown fund. The balance of the fund (£20,799) will be available as a Lifetime Allowance Excess Lump Sum benefit. Subject to how Client B wishes to take the excess lump sum, it will be subject to tax at either 25% (if it is left in the SIPP to provide an income) or at 55% (if they decide to take it all as a lump sum).

As explained, a test will always be carried out at specific points in time to ensure that the benefits held in a pension arrangement do not exceed the available LTA and the ensure any LTA charge is correctly accounted for. These tests are called benefit crystallisation events (BCE).

Important Information

The information provided is based on our current understanding of the UK legislation and may be subject to amendments as a result of changes in legislation.

All references to taxation are based on our understanding of current UK taxation law and may be affected by future changes in legislation, the individual circumstances of the investor and pension scheme conditions.

The information provided in this article is not intended to offer advice.

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