This guide is for financial advisers only. It mustn’t be distributed to, or relied on by, customers. It is based on our understanding of legislation as at May 2023.
The lifetime allowance (LTA) is the amount of pension benefits that a member can take from UK registered pension schemes. Between 2006 and 2023, there was no absolute limit on the benefits that could be paid, but if their total value exceeded the lifetime allowance a special tax charge could apply; this was called the ‘lifetime allowance charge’. While the lifetime allowance remains in place for the 2023/24 tax year, the charge has been removed, with plans in place to abolish the lifetime allowance in April 2024.
A test usually has to be carried out each time benefits are taken from a registered pension scheme, to make sure the tax charge is applied if the lifetime allowance is exceeded. The occasions when this test is carried out are called benefit crystallisation events (BCE). As the LTA remains in place for 2023/24, LTA tests must still be performed at BCEs.
BCEs generally only happen before or at age 75. The only exception to this is if an individual’s scheme pension in payment is increased by more than an allowable level, known as the ‘permitted margin’ (this is BCE3, which can occur at any age).
An individual could have several BCEs - the BCE framework is designed to make sure that the lifetime allowance is applied to the total of an individual’s benefits across all registered pension schemes. Pension benefits already in payment before 6 April 2006 (the date the lifetime allowance and BCEs were introduced) are also taken into account (although they were never subject to a lifetime allowance charge).
HMRC has defined 13 different BCEs and sets out how benefits should be valued on each event for testing against the lifetime allowance. If the event that is taking place is not listed, then that would generally mean that it’s not a BCE. For example, a benefit payable on a member’s or beneficiary’s death in flexi-access drawdown is not a BCE. Similarly, a beneficiary’s flexi-access drawdown fund would not be tested at age 75 as a BCE. The 13 BCEs are covered in the table below:
|
Benefit crystallisation event |
Crystallised amount |
|---|---|---|
1 |
Movement of money or assets held under a money purchase arrangement into drawdown. |
The total value of the amount moved into drawdown pension. Any assets moved will be valued at market value. |
2 |
A member becomes entitled to a scheme pension (whether from a defined benefits arrangement or a money purchase arrangement). |
20 times* the pension payable to the individual in the first year. |
3 |
A scheme pension already in payment is increased above both the ‘threshold annual rate’ and the ‘permitted margin’. For more detailed information see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088630. |
20 times* the excess pension arising from the increase. |
4 |
A member becomes entitled to a lifetime annuity under a money purchase arrangement (from uncrystallised funds or a drawdown fund). |
The total of the member’s rights under the arrangement used to buy the lifetime annuity (less any amounts previously crystallised under BCE1 in relation to any drawdown funds**). Any assets will be valued at market value. |
5 |
A member reaches age 75 and has not taken all of their entitlement to a scheme pension and/or lump sum under a defined benefits arrangement. |
20 times* the pension, plus the lump sum, the member would be entitled to if these benefits were taken on reaching age 75. If a lump sum is only available by commuting pension, the lump sum can be ignored. |
5A |
A member with a drawdown fund, set up on or after 6 April 2006, under a money purchase arrangement reaches age 75. |
The total value of the drawdown funds less the amounts previously crystallised under BCE1 in relation to these drawdown funds**. Any assets will be valued at market value. |
5B |
A member reaches age 75 with uncrystallised funds under a money purchase arrangement. |
The value of the uncrystallised funds. |
5C |
A member dies before age 75 and their remaining uncrystallised funds are designated for dependant’s or nominee’s flexi-access drawdown, on or after 6 April 2015, within two years of the scheme administrator being informed of the member’s death. |
The total amount that’s designated into drawdown. Any assets will be valued at market value. |
5D |
A member dies before age 75 (on or after 3 December 2014) and their remaining uncrystallised funds are used on or after 6 April 2015 to purchase (in whole or in part), a dependant’s or nominee’s annuity within two years of the scheme administrator being notified of the member’s death. |
The total amount used to purchase the annuity. |
6 |
Payment of a relevant lump sum (other than on death) before age 75. This could either be:
|
The amount of the lump sum. |
7 |
Payment of a lump sum death benefit (a defined benefits lump sum death benefit or an uncrystallised funds lump sum death benefit), where -
¹Note – This condition only applies to uncrystallised funds lump sum death benefits where paid on or after 6 April 2015. |
The amount of the lump sum death benefit. |
8 |
Transfer to a qualifying recognised overseas pension scheme (QROPS). |
The amount transferred (less any amounts previously crystallised under BCE1 in relation to any drawdown funds or BCE 2 in relation to a scheme pension**). Any assets transferred will be valued at market value. |
9 |
Any event prescribed in regulations as being a crystallisation event. |
The events so far prescribed in regulations are:
|
*HMRC and the scheme administrator may agree a higher valuation factor than 20 for scheme-wide use.
** Further information is contained in this article - Rules to prevent benefits being double counted.
Each time there’s a BCE, the crystallised amount will be tested against the individual’s available lifetime allowance. This test is generally carried out by the scheme administrator or scheme trustees.
The lifetime allowance is not a limit; benefits above the lifetime allowance can be paid out but the excess will be subject to tax at the recipient’s marginal rate.
Where an individual has been a member of only one registered pension scheme and all benefits are paid at the same time (either on death or retirement), the comparison against the lifetime allowance will be fairly straightforward. But where an individual takes benefits in stages, from one or more registered pension schemes, the comparison against the member’s lifetime allowance gets more complicated. Each BCE will use up some of the member’s lifetime allowance, leaving less against which any remaining benefits can be tested.
Example
Angus has a personal pension with a fund value of £485,000. He has no other pension arrangements. In January 2022, he took £121,250 tax-free cash (i.e. 25% of his fund) and moved the rest into flexi-access drawdown. His tax-free cash of £121,250 was tested against BCE6 and the £363,750 going into flexi-access drawdown against BCE1. A total of £485,000 was tested against the 2021/22 lifetime allowance of £1,073,100. No lifetime allowance charge was due because the amount crystallised was less than the lifetime allowance.
It gets slightly more complicated where people have multiple pension arrangements. Each time a BCE occurs, some of the member’s lifetime allowance is used up, leaving less lifetime allowance available at the next BCE. For example, Barbara has three pension arrangements, two of which have already crystallised:
| Date | Amount crystallised | Lifetime allowance at BCE | % of the lifetime allowance used | % remaining | |
|---|---|---|---|---|---|
| Pension 1 | 1 January 2008 | £750,000 | £1.6 million | (750,000/1.6m)*100=46.87% | 53.13% |
| Pension 2 | 5 February 2014 | £500,000 | £1.5 million | (500,000/1.5m)*100=33.33% | 19.8% |
If the amount crystallised when Barbara takes the benefits from her final pension arrangement is more than 19.8% of the lifetime allowance at that point, the amount of pension commencement lump sum (PCLS) will be limited to 25% of the current LTA and tax will be applied on the funds in excess of the LTA at the recipient’s marginal rate at the point they take the benefits.
Where BCEs occur at the same time (i.e. on the same day), it’s up to the individual to decide the order that the BCEs take for the purpose of the lifetime allowance test. This is only important where the lifetime allowance is going to be exceeded and allows the most valuable benefits to be taken first.
The exception to this is where the individual becomes entitled to tax-free cash. BCE 6 is always treated as occurring immediately before the BCE for the associated pension benefit (i.e. BCE 1, 2 or 4).
HMRC recognises that people are likely to have more than one BCE in their lifetime and has put in place ‘prevention of overlap’ rules to avoid the same benefits being double counted under different BCEs. The situations which commonly lead to overlap are:
- Moving funds to drawdown and later purchasing a lifetime annuity or scheme pension with those drawdown funds before age 75
- Moving funds to drawdown and then reaching age 75 with some or all of those funds still in drawdown
- Moving funds to drawdown and later transferring those funds to a QROPS before age 75
The prevention of overlap rules prevent the funds valued at the first BCE also being taken into account when assessing the second BCE.
So, if an individual takes tax-free cash and moves the balance of their funds into flexi-access drawdown, the benefits would initially be assessed under BCEs 6 and 1 respectively. If the individual later purchases a lifetime annuity from the drawdown fund, BCE4 would apply. The prevention of overlap rules make sure that the amount tested under BCE4 is reduced by the amount already tested under BCE1.
Example
In April 2016, Phil took £125,000 tax-free cash and moved £375,000 into flexi-access drawdown. The total value of £500,000 was tested against his lifetime allowance at that point using BCE6 (for the tax-free cash) and BCE1 (for the move into flexi-access drawdown). He buys a lifetime annuity in February 2022 so another BCE occurs. He hasn't taken any income so his flexi-access drawdown fund has grown to £450,000. As £375,000 of this money has already been tested, only the balance of £75,000 will be tested against his remaining lifetime allowance under BCE4.
The drawdown funds tested under BCE1 are not revalued up to the later BCE4 even if the lifetime allowance has increased in the interim period.
If Phil had not bought a lifetime annuity and instead reached age 75 with funds still in drawdown, then these funds would be tested against the lifetime allowance under BCE5A. This test works in the same way as the example shown above. So, if Phil’s drawdown fund at age 75 was £470,000 then the amount tested under BCE5A would be £95,000, being £470,000 less £375,000.
If the value of Phil’s drawdown fund when buying an annuity or on reaching age 75 was less than £375,000 (the amount originally put into flexi-access drawdown), then there would be no amount to test under BCE4 or BCE5A.
Uncrystallised funds in a money purchase arrangement at age 75 are tested under BCE5B. When the member takes their benefits after age 75, there will be no further BCE at that point.
For defined benefit arrangements, uncrystallised benefits are tested against BCE5 at age 75.
The only BCE that can occur after a member reaches age 75 is BCE3 (a scheme pension already in payment is increased above the permitted margin).
Pension benefits put in payment before 6 April 2006 (‘pre-commencement pensions’) were not subject to a lifetime allowance check. However, if the member takes further benefits on or after 6 April 2006, the benefits already taken before 6 April 2006 must also be counted against the lifetime allowance. This is done immediately before the first BCE on or after 6 April 2006 so reduces the member’s available lifetime allowance for that first BCE.
Note that valuing a pre-commencement pension is not itself a BCE and there was never a lifetime allowance charge against any pre-commencement pensions.
The value of a pre-commencement pension is:
ARP x25
where ARP stands for the Annual Rate of Pension payable to the member on the day that first BCE occurs (i.e. not to the annual rate in payment on 5 April 2006).
ARPs differ for different benefits and the table below shows the main definitions:
Type of benefit already in payment |
ARP |
|---|---|
Scheme pensions or lifetime annuities that started before 6 April 2006 |
The yearly amount of pension being paid to the member on the day that the first BCE occurs |
Drawdown pension – being paid as capped drawdown |
80 per cent of the maximum capped drawdown pension payable in the drawdown pension year in which the first BCE falls, as determined at the most recent valuation/review of the member’s fund. |
Drawdown pension – being paid as flexi-access drawdown |
80 per cent of the maximum annual drawdown amount that could have been paid under the capped drawdown rules in the drawdown pension year in which the fund converted to flexi-access drawdown. |
Details on the definition of ARP for when the first BCE took place before 6 April 2015 and the pre-commencement pension was flexible drawdown can be found at: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088300
Further details on how the maximum annual amount of capped drawdown is calculated can be found at: https://www.gov.uk/government/publications/drawdown-pension-tables
Example
Jonah was age 50 in October 2005 when he took tax-free cash and put the remaining funds into drawdown from one of his two personal pensions. These benefits have been in flexi-access drawdown since April 2017 when the maximum annual drawdown amount that could have been paid under the capped drawdown rules was £3,500.
In January 2022, he decided to take the benefits from his other personal pension. These were worth £900,000.
Immediately before the second personal pension fund was tested against the lifetime allowance, Jonah’s existing flexi-access drawdown pension had to be valued. For this purpose the flexi-access drawdown had a value of:
(£3,500 x 0.8) x 25 = £70,000
The lifetime allowance in January 2022 was £1,073,100 so after allowing for the flexi-access drawdown pension of £70,000, Jonah had £1,003,100 of the lifetime allowance left.
Having crystallised the £900,000 under his second personal pension, he has used up a total of £970,000 of the £1,073,100 lifetime allowance, or 90.39% (Note: always rounded down to two decimal places.)
Where an individual had already taken all of their pension benefits before 6 April 2006, no test against the lifetime allowance will usually be needed. The only exception to this is BCE 3, when a scheme pension already in payment is increased above the permitted margin. See also ‘Drawdown funds set up before 6 April 2006?’.
Funds moved into drawdown before 6 April 2006 are exempt from any BCEs when any of the following events take place using those drawdown funds:
- A scheme pension is bought – there is no BCE2
- A lifetime annuity is bought – there is no BCE4
- Reaching age 75 – there is no BCE5A
- A transfer to a QROPS – there is no BCE8