We will now give examples of the above except for BCEs 4 and 5D, which are not common in our SIPPs and SSASs and BCEs 2 and 6 which relate to scheme pension which Dentons does not provide.
BCEs 1 & 6
BCE 5A & 5B
BCEs 5C & 7
Laura is a member of both a defined benefit scheme and a SIPP. She has no lifetime allowance protection.
In the tax year 2007/08, when she was 60 and the standard lifetime allowance was £1.6 million, she started to receive her benefits from the defined benefit scheme.
The value of those benefits (tax-free lump sum and guaranteed annual pension) was £900,000, which used up 56.25% of the then standard lifetime allowance.
She had 43.75% of the lifetime allowance left.
In the tax year 2018/19, when she was 71 and the standard lifetime allowance was £1,030,000, she decided to crystallise her entire SIPP fund of £450,625, so that she could take her maximum tax-free pension commencement lump sum entitlement (BCE 6) and receive drawdown pension from the remaining funds (BCE1).
This used up the remaining 43.75% of her lifetime allowance.
Laura’s maximum tax-free pension commencement lump sum is £112,656.25 (25% of £450,625), leaving £337,968.75 from which drawdown pension payments can be made.
If Laura’s SIPP fund had instead been, say, £550,625, the BCEs would have created an excess above her remaining lifetime allowance of £100,000 and this would have given rise to a tax charge on the excess of 25% (£25,000) if she took an income, or 55% (£55,000) if she took the excess as a lump sum.
In the tax year 2019/20, Bill is 58 and is a member of a SIPP, which consists entirely of uncrystallised funds with a value of £400,000. He has previously crystallised funds in other pension schemes and has 40.38% of the standard lifetime allowance left.
He decides to take the entire fund of £400,000 as an uncrystallised funds pension lump sum and this uses up 37.91% of the standard lifetime allowance of £1.055 million.
He has 2.47% of the standard lifetime allowance left for any future BCEs.
The SIPP administrator can pay Bill £100,000 (25% of £400,000) tax-free but the other £300,000 is assessable income for tax purposes and the administrator has to pay it through PAYE. The administrator must pay the two amounts at the same time.
Raj is a member of a SSAS and no other pension schemes.
In the tax year 2019/20, he is aged 75.
He has lifetime allowance protection in the form of Fixed Protection (2012) and he has previously had the following BCEs under the SSAS:
> BCEs 1 & 6 in the tax year 2009/10, when the standard lifetime allowance was £1.75 million - he crystallised £800,000, which used up 45.71% of his lifetime allowance. He took a tax-free pension commencement lump sum of £200,000, leaving £600,000 from which he could take drawdown pension.
> BCEs 1 & 6 in the tax year 2015/16, now with a personal lifetime allowance of £1.8 million - he crystallised £600,000, which used up 33.33% of his lifetime allowance. He took a tax-free pension commencement lump sum of £150,000, leaving £450,000 from which he could take drawdown pension. He has 20.96% of the lifetime allowance left.
Raj has received no drawdown pension payments from the SSAS.
On his 75th birthday, Raj’s share of the SSAS fund is £1.5 million and consists of £1.3 million of crystallised funds and £200,000 of unused uncrystallised funds.
> BCE 5A – as the value of Raj’s crystallised funds on his 75th birthday (£1.3 million) exceeds the total of crystallised funds left after BCEs 1 & 6 in the tax years 2009/10 and 2015/16 of £1,050,000* (£600,000 + £450,000), the excess of £250,000 is tested against his remaining lifetime allowance. This uses up 13.88% of his lifetime allowance. He has 7.08% of the lifetime allowance left.
> BCE 5B – Raj’s unused uncrystallised funds of £250,000 are also tested against his remaining lifetime allowance of 7.08% of £1.8 million, which is £127,440. As the value of his unused uncrystallised funds exceeds this amount, the excess of £122,560 is subject to a tax charge of 25%.
* If Raj had used any of these crystallised funds to buy a lifetime annuity, the £1,050,000 would be reduced by the cost of the annuity.
Raj would still be entitled to a tax-free cash lump sum of £31,860 (25% of £127,440) at any time from his unused uncrystallised funds. However, if he were to die before receiving it, those funds would remain in the SSAS along with the rest of Raj’s share of the SSAS fund for the Trustees to distribute at their discretion, to his beneficiaries as taxable death benefits.
Sylvia is a member of a SIPP and a defined benefit scheme. She has had BCEs 1 and 6 in both schemes over the years and has 10% of the standard lifetime allowance left.
Sadly, Sylvia dies in the tax year 2019/20 aged 71 when the standard lifetime allowance is £1.055 million. Her SIPP has a value of £650,000 and consists of £450,000 of crystallised funds and £200,000 of unused uncrystallised funds.
The SIPP Administrator goes through its procedures for deciding (at its absolute discretion) who should benefit from Sylvia’s SIPP funds and decides to follow Sylvia’s expressed wishes in the Form of Nomination she lodged with the Administrator. The beneficiaries are her adult grandchildren Kate and Brian and each are to receive benefits from half of the funds.
Kate says she wants to keep her share in the SIPP and receive beneficiary’s drawdown pension payments as and when she needs them. Brian says he wants his share as a lump sum.
> BCE 5C – as Kate has designated £100,000 of the unused uncrystallised funds for beneficiary’s drawdown pension (along with £225,000 of the crystallised funds), this is tested against Sylvia’s remaining lifetime allowance.
> BCE 7 – likewise, the £100,000 of unused uncrystallised funds that is paid to Brian as part of his total lump sum of £325,000, is tested against Sylvia’s remaining lifetime allowance.
As Sylvia’s remaining lifetime allowance is £105,500 (10% of £1.055 million), the unused uncrystallised funds exceed that amount by £94,500. The excess is allocated equally between Kate and Brian, which results in a tax charge of 25% on Kate’s share and 55% on Brian’s because he has taken it as a lump sum.
Sylvia’s personal representatives are responsible for carrying out the test and the beneficiaries are liable for the tax charge.
As Sylvia died before her 75th birthday, the benefit payments to the beneficiaries will normally be free of any other tax charges provided that within two years of Sylvia’s death, the lump sums (from either crystallised funds or unused uncrystallised funds) are paid out and unused uncrystallised funds are designated for a beneficiary’s drawdown pension.
In the tax year 2019/20, Malcolm emigrates to Australia. He is a member of a SIPP, which has a value of £1,200,000 and consists of £1,000,000 of crystallised funds and £200,000 of uncrystallised funds. He has Fixed Protection 2016, so he has a personal lifetime allowance of £1.25 million.
He joins an Australian pension scheme that is a QROPS and decides to transfer the full value of his SIPP to it.
He is 65 and has had two lots of BCEs 1 and 6 in earlier years, which have used up 78% of his lifetime allowance. The amounts of crystallised funds left after each BCE and having taken his tax-free pension commencement lump sum entitlement, together total £950,000.
Therefore, the amounts that need to be tested against his remaining lifetime allowance of £275,000 (22% of £1.25 million) are the £50,000 of growth on the crystallised funds (in a similar way to BCE 5A) and the £200,000 of uncrystallised funds (in a similar way to BCE 5B) – a total of £250,000.
As the amount to be tested is less than his remaining lifetime allowance, there is no excess above the lifetime allowance and no tax charge.
For more information:
Pension scheme benefits and the lifetime allowance
Lifetime allowance protection
Pensions or annutites that came into payment before 6 April 2006
What is a Benefit Crystallisation Event (BCE)?