PTM088100 - The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: benefit crystallisation events overview - HMRC internal manual (2022)

Glossary PTM000001

What is a benefit crystallisation event (BCE)
The benefit crystallisation events (BCEs) in brief
Testing the available lifetime allowance at a BCE
Unauthorised member payments
Pensions in payment on 5 April 2006
Reports to HMRC

Sections 216 and 217 and schedule 32 Finance Act 2004

The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171

What is a benefit crystallisation event (BCE)

The legislation specifies the 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).

When a BCE occurs, the scheme administrator compares the value of the member’s pension benefits to the member’s lifetime allowance that is still available. Any crystallising amount that exceeds the level of lifetime allowance available is charged to tax under the lifetime allowance charge - see PTM083000.

The benefit crystallisation events (BCEs) in brief

A BCE arises in the following circumstances:

Taking pensions

BCE 1

Where funds are designated to provide a member with a drawdown pension (see PTM088610).

(Video) Lifetime Allowance Explained: Should you avoid this pension tax?

BCE 2

Where a member becomes entitled to a scheme pension, whether from a defined benefits arrangement or a money purchase arrangement (see PTM088620).

BCE 3

Where a scheme pension already in payment to a member is increased beyond a permitted margin (see PTM088630).

BCE 4

Where a member becomes entitled to a lifetime annuity under a money purchase arrangement (see PTM088640).

Unused funds at age 75 or death

BCE 5

Where a member reaches their 75th birthday under a defined benefits arrangement or a collective money purchase arrangement without having drawn all or part of their entitlement to a scheme pension and / or lump sum (see PTM088650).

BCE 5A

Where a member reaches age 75 with a drawdown pension fund or flexi-access drawdown fund (see PTM088650).

BCE 5B

Where a member reaches age 75 under a money purchase arrangement, other than a collective money purchase arrangement, in which there are remaining unused funds (see PTM088650).

BCE 5C

Where a member dies before their 75th birthday and relevant unused uncrystallised funds remaining at death are designated, on or after 6 April 2015 but before the end of a 2-year period, to provide a dependants’ flexi-access drawdown pension or a nominees’ flexi-access drawdown pension (see PTM088660).

BCE 5D

Where a member dies before their 75th birthday and relevant unused uncrystallised funds remaining at death are used to provide entitlement to a purchased dependants’ or nominees’ annuity. The death must have occurred on or after 3 December 2014 with the entitlement arising on or after 6 April 2015 but before the end of a 2-year period (see PTM088660).

Lump sums

BCE 6

Where the member becomes entitled to a relevant lump sum. Not all the authorised lump sum payments are relevant lump sums (see PTM088670).

Death

BCE 7

Where a relevant lump sum death benefit is paid on the death of the member (see PTM088680). Not all the authorised lump sum payments that may be paid on the death of the member are relevant lump sum death benefits.

Transfer to QROPS

BCE 8

Where a member’s benefits or rights are transferred to a qualifying recognised overseas pension scheme (QROPS) (see PTM088690).

Other

BCE 9

Where certain payments are made to or in respect of a member that constitutes an event that is prescribed in regulations (see PTM088700)

These payments are currently:

  • payments of ‘arrears’ of pension after death
  • excessive pension commencement lump sums (PCLS) based on pension errors
  • PCLS type lump sums paid after death.

Until 6 April 2011, BCE 1 also arose where the member reached age 75 still holding uncrystallised funds in a money purchase arrangement. This is now replaced by BCE 5B. Also, on that date unsecured pensions and alternatively secured pensions were replaced by drawdown pensions. For guidance on these aspects, go to the National Archive pages from RPSM11102000.

The issue of when entitlement arises in the context of each of the different BCEs is explained at PTM088200.

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Testing the available lifetime allowance at a BCE

The lifetime allowance

Everyone has a personal lifetime allowance and for most people it’s the standard lifetime allowance. Some people may however have a higher or lower lifetime allowance - see PTM081000.

The lifetime allowance charge

The lifetime allowance charge is charged on the ‘chargeable amount’ whenever a BCE results in an excess over the member’s available lifetime allowance. There are two tax rates, depending on whether the chargeable amount is a ‘lump sum amount’ or a ‘retained amount’ - see PTM083000.

Rate of charge

It should be clear from the type of BCE involved whether the chargeable amount is a lump-sum amount or a retained amount:

  • if the amount crystallised is retained in the scheme (or in an overseas scheme) to provide pension benefits then the chargeable amount is a retained amount - for which any lifetime allowance charge is 25%; this tax rate is applied to any amount crystallising over and above the member’s available lifetime allowance through BCE 1, BCE 2, BCE 3, BCE 4, BCE 5, BCE 5A, BCE 5B, BCE 5C, BCE 5D and BCE 8
  • if the amount crystallised is paid as a lump sum, to or in respect of the member the chargeable amount is a lump sum amount for which any lifetime allowance charge is at 55%; this applies to any amount crystallising over and above the member’s available lifetime allowance through BCE 6, 7 or 9.

The legislation distinguishes between different benefit payments through different BCEs because each needs to be valued in a different way in order to obtain an appropriate measure of its capital value.

Valuing the benefits

The scheme administrator must establish the capital value of the member’s pension savings that the BCE relates to. This is referred to in the legislation as the amount that crystallises at that event (hence the term benefit crystallisation event). This value is then compared to the individual’s lifetime allowance that is still available at the time of the BCE (if any). If the amount crystallising exceeds the level of lifetime allowance available, then the excess represents a chargeable amount.

PTM088400 deals with the processes involved before, at and after a BCE.

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. But where a scheme pension is being paid a conversion factor (usually 20) needs to be applied to the annual pension coming into payment in order to arrive at a capital, crystallised value. Once it is in payment, any increases in that pension beyond an accepted margin also trigger a BCE. An exception to the normal rule whereby a scheme pension is valued using a conversion factor is where BCE 9 is prescribed in regulations to apply where arrears of pension are paid after a member’s death. This is where entitlement to those pension instalments for the purpose of the tax rules could not be established before death. In such a case the crystallised amount is the amount of the lump sum that represents the arrears of pension.

PTM088600 onwards explain in more detail how the crystallised value is calculated at each of the different BCEs.

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Unauthorised member payments

Where scheme funds are used to provide a benefit or make a payment that does not conform with the pension rules, lump sum rule or lump sum death benefit rule (and is not one of the other authorised member payments) that payment is an unauthorised member payment.

An unauthorised member payment is not a BCE and will never trigger a lifetime allowance test. This is because unauthorised member payments attract different tax charges.

For example, if a lump sum is paid which does not satisfy the conditions for a pension commencement lump sum (for example, it is not linked to the commencement of a pension benefit) and it does not satisfy the conditions for a serious ill-health lump sum, a stand-alone lump sum or an uncrystallised funds pension lump sum, a lifetime allowance test is not triggered as it is not within BCE 6. If it also fails to satisfy the conditions for any other type of authorised lump sum payment, the lump sum would be taxable on the individual as an unauthorised member payment, and there may also be a scheme sanction charge for the administrator. The effective rate of charge on the unauthorised member payment is therefore likely to at least match the highest rate of lifetime allowance charge.

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Pensions in payment on 5 April 2006

Section 219(8) and paragraph 20 schedule 36 Finance Act 2004

A pension in payment on 5 April 2006 (what the legislation refers to as a pre-commencement pension) is only taken into account for lifetime allowance purposes when or if a BCE first occurs in respect of that individual, whether under the same or a different registered pension scheme. If no BCE occurs in respect of that individual, the pre-commencement pension will never be considered for lifetime allowance purposes.

When the first BCE for an individual occurs, the amount of lifetime allowance available at that BCE will be reduced by the crystallised value of any pre-commencement pensions in payment at that time, as valued immediately before that BCE. No actual BCE occurs in respect of the pre-commencement pension, so no chargeable amount will ever be generated by it. PTM088300 explains this in more detail, with some examples.

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Reports to HMRC

Regulation 3 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567

The scheme administrator is required to report certain events to HMRC, using the Pension Schemes Online Service.

For example, if the member is relying on an entitlement to an enhanced or protected lifetime allowance in order to reduce or eliminate a liability to a lifetime allowance charge at a BCE, the scheme administrator must report this to HMRC - see PTM164100.

For details of the event report, see PTM161100.

FAQs

What is benefit crystallisation on a pension? ›

A Benefit Crystallisation Event (BCE) is when the pension scheme administrator (or in certain circumstances, the pension scheme member's personal representatives) must test the value of the benefits in a member's pension scheme that are being crystallised, or deemed to be crystallised, against the member's lifetime ...

What is the difference between Crystallised and Uncrystallised pension? ›

What is the difference between a crystallised and an uncrystallised pension? An uncrystallised pension is a one that hasn't been cashed in via drawdown or annuity. Crystallising your pension is the process of freeing up your investments and accessing your savings.

Are Crystallised funds tested against LTA? ›

If the value at age 75 is higher, the difference between the two figures is what crystallises and is tested against the available LTA. Drawdown funds created before 6 April 2006 don't have this test at age 75.

What happens to my Uncrystallised pension at 75? ›

Regardless of whether the benefits are uncrystallised or in drawdown after age 75, the beneficiary will be subject to income tax on any benefits taken. Death after age 75 is not a benefit crystallisation event so there is no lifetime allowance tax charge payable on death after age 75.

What is the lifetime allowance charge? ›

If the total value of your pension benefits exceeds the lifetime allowance when a check is done, there will be tax to pay on the excess. This is called the lifetime allowance charge. The way the charge applies depends on whether the excess is taken as a lump sum or as income.

What happens if pension fund exceeds the lifetime allowance? ›

If you go over this lifetime allowance, you'll generally pay a tax charge on the excess when you take a lump sum or income from your pension pot, transfer overseas, or reach age 75 with unused pension benefits. The excess can be paid as a lump sum, subject to a 55% tax charge.

Is it best to take maximum lump sum from pension? ›

It's worth being aware that taking a large lump sum from your pension could reduce any entitlement you have to state benefits now, or in the future. This is because some state benefits are based on the income you have coming in, and the amount of savings you have.

How is lifetime allowance calculated? ›

The lifetime allowance is calculated by multiplying your yearly pension by 20 and adding any lump sum you take from the scheme, including a lump sum from AVCs. The tool will not take into account: any pension that is already being paid to you or any pension you have with other pension schemes.

When should I Crystallise my pension? ›

A pension becomes 'crystallised' as soon as you withdraw a retirement income from your pension fund. A pension crystallises when you get access to your pension savings and you cash it in. The earliest you can crystallise your pension is currently at 55, unless you get early access due to ill health.

Can I contributions to a pension after crystallisation? ›

As it is now more common for pension contributions to continue after crystallisation – partly due to more people taking a phased retirement – the ability to continue to make contributions is important.

Can I still pay into a Crystallised pension? ›

Yes, you can still make contributions to your pension pot, which will continue to grow in line with the funds your savings are invested in.

How do I avoid lifetime allowance tax charges? ›

If you are married, one strategy that could help you avoid crossing the LTA threshold is to redirect your retirement savings into your spouse's pension, as they will have their own separate Lifetime Allowance. This can be an effective way of avoiding the limit.

How can I avoid paying tax on my pension? ›

Ways to reduce tax on your pension however include:
  1. Not withdrawing more than you need from your pension each year.
  2. Utilising a drawdown scheme so that you can vary your yearly pension income.
  3. Taking out small pension pots in one lump sum to benefit from 25% being tax free.
  4. Avoid drawing large pensions in one go.
Apr 26, 2022

Is lifetime allowance test on death? ›

As the total percentage used is 10.12% over the lifetime allowance, that percentage of the lifetime allowance is liable to a charge. On death the liability for the tax charge lies solely with the beneficiary.

Does pension increase after 70 years? ›

The Committee is of the view that the Government should sympathetically consider the demand of Pensioners' Associations for 5% additional quantum of Pension on attaining the age of 65 years, 10% on 70 years, 15% on 75 years and 20% on 80 years to the Pensioners.

Can I get tax free after age 75? ›

If paid before age 75, it's tax free as long as it's within the individual's available lifetime allowance. After 75, it can only be paid from unused funds and would be subject to a 45% tax charge.

What happens to Uncrystallised funds on death? ›

On death before age 75 the benefits can be paid as a lump sum or as a drawdown pension to any beneficiary tax-free, irrespective of whether they derived from uncrystallised or crystallised monies. On death after age 75 the benefits can be drawn down or paid as a lump sum taxed at the beneficiary's marginal rate.

Who pays the lifetime allowance tax charge? ›

The lifetime allowance charge (LAC) arises when a person has a pension scheme (or schemes) with a value of more than the lifetime allowance (LA). If there is a LAC then this gives rise to a tax liability which is paid to HMRC.

Who pays the lifetime allowance charge on death? ›

If a lifetime allowance charge is due, the dependant/nominee is liable for it. The scheme administrator will pay the death benefits out without regard to any potential lifetime allowance charge. The lifetime allowance charge will be 55% under BCE 7 and 25% under BCE 5C or 5D.

How does the lifetime allowance tax charge work? ›

The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you - the rate is: 55% if you get it as a lump sum. 25% if you get it any other way, for example pension payments or cash withdrawals.

What is meaning of Crystallised? ›

Definition of crystallize

transitive verb. 1 : to cause to form crystals or assume crystalline form. 2 : to cause to take a definite form tried to crystallize his thoughts.

What is an Uncrystallised funds pension lump sum? ›

Overview. Uncrystallised funds pension lump sum (UFPLS) allows pension holders to withdraw some or all of their uncrystallised funds as a lump sum. Within the limitations of the Lifetime Allowance, 25% of the UFPLS will be paid tax free, with the balance taxed as pension income at the point of withdrawal.

Can you transfer a Crystallised pension? ›

When crystallised pension funds are transferred from one scheme to another, they can only be transferred on a 'like-for- like' basis. When it comes to drawdown transfers, this means the transfer will either be a capped-drawdown-to-capped- drawdown transfer or a flexi-access-drawdown-to-flexi-access-drawdown transfer.

Can you pay into a Crystallised pension? ›

Yes, you can still make contributions to your pension pot, which will continue to grow in line with the funds your savings are invested in.

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