BCEs and valuing benefits against the LTA
These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.Wed Feb 14 09:39:00 GMT 2018 Back to results
The lifetime allowance (LTA) is the amount of pension benefits that a member can take from a UK registered pension scheme without incurring a tax charge known as a lifetime allowance charge.
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).
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). There is no BCE when a lifetime annuity is bought from a drawdown pension fund after age 75.
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 are also taken into account (although they will never be 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 (LTA). 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 the permitted margin (in most cases this is the original level of pension increased by the higher of 5% and the Retail Prices Index). There is an exemption for increases that apply to a certain number of scheme members.||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 individual’s rights under the arrangement used to buy the lifetime annuity funds (less any amounts previously crystallised under BCE1 in relation to any drawdown pension funds**). Any assets will be valued at market value.|
|5||An individual 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 individual 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||An individual with drawdown pension funds, set up on or after 6 April 2006, under a money purchase arrangement reaches age 75.||The total value of the drawdown pension funds less the amounts previously crystallised under BCE1 in relation to these drawdown pension funds**. Any assets will be valued at market value.|
|5b||An individual 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 dependants’ or nominees’ annuity within the two year period mentioned above.||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 - ||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 pension funds**). 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 the FAQ below - Are there rules to prevent benefits being double counted?
Each time one of the BCEs happen, 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 a lifetime allowance charge.
Where an individual has been a member of only one registered pension scheme and all benefits are paid at the same time on or after 6 April 2006 (either on death or retirement), the comparison against the lifetime allowance will be fairly straightforward. But where an individual takes benefits in stages on or after 6 April 2006, from one or more registered pension schemes, the comparison against the individual’s lifetime allowance gets more complicated. Each BCE will use up some of the individuals’ lifetime allowance, leaving less against which any remaining benefits can be tested.
Angus has a personal pension with a fund value of £485,000. He has no other pension arrangements. In May 2018, he takes £121,250 tax-free cash (ie 25% of his fund) and moves the rest into flexi-access drawdown. His benefits are tested against BCE6 and BCE1. The amount tested is £121,250 for BCE6 and £363,750 against BCE1. A total of £485,000 is tested against the lifetime allowance of £1,030,000. No lifetime allowance charge is due because the amount crystallised is less than the lifetime allowance.
It gets slightly more complicated where people have multiple pension arrangements. Each time a BCE occurs, some of the individual’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 the point the benefits are crystallised, a lifetime allowance charge will be due.
Where BCEs occur at the same time (ie 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, as it may affect the amount of lifetime allowance charge payable.
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 (ie BCE 1, 2 or 4).
Yes. HMRC recognises that more than one event can take place in an individual’s 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:
- Initial move to drawdown pension and later purchase of a lifetime annuity or scheme pension before age 75
- Initial move to drawdown pension and then reaching age 75
- Initial move to drawdown pension and later transferring to a QROPS before age 75
The prevention of overlap rules prevent the value of the first BCE also being taken into account when assessing the second BCE arising from the same layer of benefits.
So, if an individual takes tax-free cash and moves the balance of their funds into a flexi-access drawdown pension, the benefits would initially be assessed under BCEs 6 and 1 respectively. If the individual later purchases a lifetime annuity from the drawdown pension 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.
In April 2016, Phil took £125,000 tax-free cash and moved £375,000 into a flexi-access drawdown pension. 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 pension). He buys a lifetime annuity in 2018 so another BCE occurs. He hasn't taken any income so his flexi-access drawdown pension 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.
If the lifetime allowance has increased in the interim period, the drawdown funds tested under BCE1 are not revalued at the later BCE4 to reflect the increase.
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.
Since 6 April 2011, there’s been no requirement to take any benefits from a money purchase arrangement by age 75 (subject to scheme rules). If an individual doesn’t plan to take their benefits until after age 75, then all uncrystallised funds are tested under BCE5b when they reach age 75. When the individual finally comes to take their pension benefits, there will be no further BCE at this point.
For defined benefits arrangements, uncrystallised benefits are tested against BCE5 at age 75.
The only BCE that can occur after a member is aged 75 or over, is BCE 3 (a scheme pension already in payment is increased above the permitted margin).
Funds moved into drawdown (referred to as income drawdown at the time) before 6 April 2006 are exempt from any BCEs when any of the following events take place on or after 6 April 2006 using the 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
Pensions Technical Services