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Pre 6 April 2023 - Benefit crystallisation events and the lifetime allowance charge

Published  06 April 2024
   6 min read

The lifetime allowance is the maximum amount that can be crystallised before a charge applies. It is currently £1,073,100.

From 6 April 2023 the lifetime allowance charge has been removed and from 6 April 2024 the lifetime allowance will be abolished. This article covers the rules before 6 April 2023.

There are a number of benefit crystallisation events, each one triggers a test against the lifetime allowance. In this article we'll cover the more frequent benefit crystallisation events we receive queries on.

Key facts

Pension benefits held in a registered pension scheme will be tested against the lifetime allowance when:

  • the individual chooses to take them
  • on their death
  • at age 75
  • on transfer to a qualifying recognised overseas pension scheme (QROPS)
  • this article covers the rules before 6 April 2023
  • Triviality lump sums such as small lump sums and trivial commutation lump sums aren’t tested against the lifetime allowance.
  • The lifetime allowance can be reduced in certain circumstances

What was tested against the lifetime allowance?

There were a number of benefit crystallisation events (BCEs), each one triggered a test against the lifetime allowance. These were:

BCE 1 Going into drawdown
BCE 2 Becoming entitled to a scheme pension
BCE 3 Scheme pension already in payment increased beyond the permitted margin
BCE 4 Becoming entitled to a lifetime annuity
BCE 5 Reaching age 75 under a defined benefit scheme or collective money purchase scheme
BCE 5A Reaching age 75 in drawdown
BCE 5B Reaching age 75 with unused funds in a money purchase scheme
BCE 5C Where the member dies before their 75th birthday and uncrystallised funds are used to provide beneficiary drawdown
BCE 5D Where the member dies before their 75th birthday and uncrystallised funds are used to purchase a beneficiary’s lifetime annuity
BCE 6 Where a relevant lump sum is paid to the member. This includes tax-free cash, uncrystallised funds pension lump sums and a serious ill health lump sum.
BCE 7 Where a relevant lump sum is paid on the death of the member
BCE 8 Transfer to a Qualifying Recognised Overseas Pension Scheme
BCE 9

The making of the following authorised member payments as per HMRC Pensions Tax Manual - PTM088700: BCE 9 prescribed authorised member payments:

  • Payment of arrears of pension after death
  • Lump sums based on pension errors
  • PCLS type lump sums paid after death.

We cover the more frequent benefit crystallisation events we received queries on below.

What was not tested against the lifetime allowance?

The payment of the following were not benefit crystallisation events and were not tested against the lifetime allowance:

  • Trivial commutation lump sums
  • Small lump sums
  • Trivial commutation lump sum (paid in connection with a scheme-specific pension commencement lump sum)
  • Winding-up lump sums
  • Payment of a relevant accretion
  • Refund of excess contributions lump sums

Any benefits that were already in payment pre-6 April 2006 were never benefits crystallisation events.

Some common events

Taking benefits

Every time someone took benefits, the crystallised value iswas tested against the lifetime allowance.

The crystallised value for a defined contribution scheme is the amount of the fund taken; for a defined benefit scheme it’s 20 x the pension taken plus the tax-free cash. The pension used is the pension before any commutation for tax-free cash. However, if tax-free cash is provided separately (as is common in public sector schemes), it will be added in as a lump sum.

HMRC Pensions Tax Manual – PTM088100: Benefit crystallisation events overview (opens in a new window)

Karen’s story

Take Karen, who took benefits with a value of £125,000 in 2015 when the lifetime allowance was £1.25 million. The scheme administrator asks her if she has used any lifetime allowance already and sends her a statement that shows she's used up 10% of the lifetime allowance with this crystallisation.

If she crystallises more funds, she’ll be able to tell the scheme administrator she’s already used up 10% of the lifetime allowance. If her next crystallisation uses up another 20% of the lifetime allowance, she'll have used a total of 30% and will have 70% left to apply to future benefit crystallisation events. The 70% will be applied to the lifetime allowance in force at the time of the next benefit crystallisation event.

If she crystallises an amount that’s more than the lifetime allowance she has left, the scheme administrator will ask her whether she wants to take the excess as a lump sum or use it to provide income. Not all scheme administrators will offer both options.

If she chooses a lump sum, a charge of 55% of the amount over the available lifetime allowance will be deducted by the scheme administrator and paid to HMRC with the balance paid to Karen. This can be paid on top of the tax-free cash taken but remember that tax-free cash is restricted to the lower of 25% of the fund and 25% of the lifetime allowance that’s left.

If she chooses income, the charge will be 25% of the amount over the available lifetime allowance with the balance used to provide an annuity or be designated to provide a drawdown income.

You can find more information and examples in our article lifetime allowance charge.

HMRC Pensions Tax Manual – PTM083000: The lifetime allowance charge overview (opens in a new window)

Reaching age 75

Benefit crystallisation events happen automatically at age 75. These are:

Benefit crystallisation event 5 – where someone reaches age 75 without having taken all or only part of their defined benefit scheme benefits.

The defined benefit pension is valued at 20 x the full pension they would have received if they had taken benefits at age 75. The pension used is the pension before any commutation for tax-free cash. However, if tax-free cash is provided separately (as is common in public sector schemes), it will be added in as a lump sum. The total amount is tested against the lifetime allowance available.

HMRC Pensions Tax Manual – PTM088650: BCE 5: Age 75 without taking all entitlements under a defined benefits arrangement (opens in a new window)

Benefit crystallisation event 5A – where someone reaches age 75 having already started drawdown

This benefit crystallisation event is triggered if there are still drawdown benefits to be paid out. The amount tested is the difference between the value of the fund at age 75 less the amount originally crystallised.

Obviously making withdrawals from the drawdown fund will result in a lower level of growth or no growth at all. However, the withdrawals themselves will be liable for income tax.

HMRC Pensions Tax Manual – PTM088650: BCE 5A – Where someone reaches age 75 having already started drawdown (opens in a new window)

Benefit crystallisation event 5B: age 75 money purchase arrangement without any or only some funds designated as drawdown pension 

The uncrystallised fund is tested against the remaining lifetime allowance available.

HMRC Pensions Tax Manual – PTM088650: BCE 5B – Where someone reaches age 75 without having taken benefits yet from a defined contribution scheme (opens in a new window)

Alan’s story 

Alan crystallised his £200,000 pension fund on 1 October 2014, taking £50,000 tax-free cash with the balance of £150,000 going into drawdown. This used up 16% of the 2014/15 lifetime allowance of £1.25 million. On 1 October 2022 (his 75th birthday), the drawdown fund is worth £220,000. The £70,000 growth in the fund is tested against £901,404 which is 86% of the lifetime allowance in 2022/23, so no lifetime allowance charge is due.

Can there be a benefit crystallisation event after age 75?

After age 75 the only benefit crystallisation event that can happen is where an annuity increases by more than a prescribed amount. This would be a rare occurrence, so for all practical purposes no benefit crystallisation event can happen after age 75.

HMRC Pensions Tax Manual – PTM088630: BCE 3 - Increase to a scheme pension in payment (opens in a new window)

 

Death

Death before age 75 is also a benefit crystallisation event so there’s no escaping a lifetime allowance test – an individual’s pension rights will be tested at some point. But a lifetime allowance charge will only apply if the benefit crystallisation event value is wholly or partly over the lifetime allowance available.

HMRC Pensions Tax Manual – PTM088660: BCE 5C and BCE 5D relevant unused uncrystallised funds applied for drawdown or annuity following a death (opens in a new window)

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

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