Pensions: HMRC Rules for Crystallisation Events

Question 1

Lifetime Allowance LTA

Answer 1

• is the limit that applies to all pension savings built up prior to 6 April 2006 - A DAY

Question 2

LTA Limits

Answer 2

• £1.5 million in 2012/13 and 2013/14;
• £1.25 million in 2014/15 and 2015/16;
• £1 million 2016/17 and 2017/18, and is then set to increase by CPI from April 2018 onwards.
• The Office of National Statistics confirmed that CPI was 3% for September 2017 and this is the figure used for setting the increase for the lifetime allowance in the next tax year 2018/19. Therefore, for 2018/19 the LTA is £1,030,000.

Question 3

Benefit Crystallisation Events BCEs

Answer 3

When benefits from a registered pension scheme (RPS) come into payment, the value of the pension savings must be tested against the LTA in force at that point. Any event that triggers a test against the member’s LTA is called a BCE.

Question 4

Types of Crystallisation

Answer 4

• Scheme Pension - pension paid directly by a Registered Pension Scheme RPS - DB or Insurance based
• Lifetime Annuity - from a Money Purchase fund
• Drawdown pension - drawing income from a MP fund
• UFPLS - lump sum taken without designating funds into a Drawdown Plan

Question 5

Age 75 Rule

Answer 5

LTA must be tested at age 75 even if benefits haven’t been taken - known as Unused Funds

Question 6

BCEs - Part 1

Answer 6

13 in total

Question 7

BCEs - Part 2

Answer 7

13 in total

Question 8

Tax Charge against LTA

Answer 8

• Benefits valuations in excess of the member’s LTA will be taxed at 55% if the excess is taken as a lump sum

or

• 25% if the excess is taken as income

Question 9

Using the valuation factors: benefits that started on or after 6 April 2006 (‘A-Day’)

Answer 9

Pension benefits already in payment before A Day must be taken into account at the time of the first BCE after A Day.

The LTA used in respect of each BCE will be the LTA in the tax year of each respective BCE, and when calculating the percentage of the LTA used in respect of each BCE, it should be expressed to two decimal places and not rounded.

Question 10

Using the valuation factors: benefits that started before 6 April 2006 (‘A-Day’)

Answer 10

The valuation of benefits started before A-Day only takes place on the first BCE that happens after A-Day.

The valuation is used to establish the percentage of the LTA that has been used up in respect of the benefits that started before A-Day.

The percentage is then used for all future BCEs.

A standard 25:1 valuation factor is used for pre-A-Day income benefits

Question 11

Valuing Drawdown Benefits

Answer 11

Question 12

Higher LTA

Answer 12

In certain circumstances, individuals may be entitled to a higher LTA:

• if they are not UK residents;
• if they have transferred benefits in from recognised overseas pension schemes;
• if they have an entitlement to benefits arising from a pension credit in respect of a sharing order following divorce, effected before 6 April 2006; or
• if they have an entitlement to a pension credit in respect of a sharing order following divorce. The order was acquired on or after 6 April 2006 and was derived from a pension that started on or after 6 April 2006 and was already in payment to the original member at the time of the sharing order.
• if they have benefits in respect of a pre-A-Day pension scheme and they have registered for enhanced or primary transitional LTA protection;
• if they have registered for fixed protection 2012 because of the reduction of the LTA from £1.8 million to £1.5 million on 6 April 2012; or
• if they have registered for fixed protection 2014 or individual protection 2014 as a result of the reduction of the LTA from £1.5 million to £1.25 million on 6 April 2014.
• if they have registered for fixed protection 2016 or individual protection 2016 as a result of the reduction of the LTA from £1.25 million to £1 million on 6 April 2016

Question 13

Pension credits on divorce

Answer 13

IAPC / SLA

Where:

• IAPC is the amount of the pension credit awarded increased by the percentage increase in the Retail Prices Index (RPI) from the month in which the rights were acquired to April 2006; and
• SLA is the standard LTA for the tax year 2006/07, i.e. £1.5 million.

Question 14

Pension credit acquired on or after 6 April 2006 for a pension in payment that commenced after 5 April 2006

Answer 14

In this scenario the LTA of the ex-spouse may be enhanced to reflect the fact that the member’s pension came into payment on or after 6 April 2006 and would have been tested against the original member’s LTA at that time.

The LTA enhancement factor is called the pension credit factor. However, it should be noted that this only applies where the pension came into payment after 5 April 2006; there is no entitlement to a LTA enhancement factor if pension credit rights are acquired on or after 6 April 2006 and the pension is not yet in payment.

The provision of an enhanced LTA for the ex-spouse is to ensure that the pension credit rights are not tested again (twice) for LTA purposes when the ex-spouse crystallises those rights.

Question 15

NORMAL MINIMUM PENSION AGE NMPA

Answer 15

Since 6 April 2010, benefits can be taken from all pension schemes from the normal minimum pension age of age 55. The member does not have to retire/stop working to take the benefits.

Benefits can be paid to a member before the normal minimum pension age if the benefits are paid:

• on ill-health grounds; or
• if the member had the right, on 5 April 2006, to take benefits before the normal minimum pension age

Question 16

Ill health

Answer 16

The member may take their benefits early on the grounds of ill-health where:

• the scheme administrator receives medical evidence from a recognized medical practitioner that the member is, and will continue to be, medically incapable of continuing his or her current occupation because of injury, sickness, disease or disability; and
• as a result of the ill-health, the member has ceased that occupation.

Question 17

Ill Health - options

Answer 17

From 6 April 2015 a member who satisfies the ill-health conditions can access their benefits at any age as a:

• trivial commutation lump sum payment (if the conditions are satisfied).
• small pots payment (if the conditions are satisfied).
• an uncrystallised funds pension lump sum (UFPLS) (in respect of a money purchase scheme).

If a trivial commutation lump sum payment or a small pots payment is made the benefits will not be tested against the member’s LTA.

In all other cases, the amount crystallised will be tested against the member’s full LTA (as it would be for members who have reached NMPA).

Question 18

Pre-6 April 2006 rights to take benefits before normal minimum pension age

Answer 18

Transitional protection is in place for a deferred or current member of an occupational pension scheme who is contractually entitled to take their pension benefits from age 50. Such members are still able to take their benefits from age 50, provided:

• the rules of the scheme allow benefits to be taken from age 50;
• this provision was in the scheme rules before 10 December 2003; and
• all benefits are taken in full.

In this scenario, the LTA is not reduced.

Question 19

Normal Minimum Pension Age

Answer 19

The intention is that the normal minimum pension age will increase in line with increases in State Pension age (SPA).

• The increase is to come into force by 2028 by which time the SPA will have increased to 67.
• From 2028 members will not be able to draw their private pension savings without a unauthorised tax penalty until the age of 57.
• Thereafter the normal minimum pension age will rise in line with increases in the SPA so that it is always 10 years earlier than SPA.

Question 20

LUMP SUMS

Answer 20

• PCLS
• UFPLS
• Small Pots Payment
• Trivial Commutation Lump Sum
• Serious ill-health commutation

Question 21

Lump Sums - PCLS

Answer 21

Where the member’s benefits are taken as a scheme pension, a lifetime annuity or a drawdown pension, the member may be able to take a tax-free cash lump sum when the payment of benefits commences (hence the difference between pension commencement lump sum and uncrystallised funds pension lump sum)

The maximum allowable PCLS is normally the lower of:

• 25% of the capital value of the benefits coming into payment; and
• 25% of the available portion of the member’s remaining LTA.

Scheme Rules determine actual PCLS paid.

Question 22

Lump Sums - UFPLS

Answer 22

Since 6 April 2015 it has been possible to access some or all of uncrystallised (or ‘unused’ if post 75) money purchase pension funds as a lump sum without designating funds to a drawdown plan via an UFPLS.

The maximum tax-free cash permitted is 25% of the member’s available lifetime allowance.

Taking a UFPLS is a trigger event for the money purchase annual allowance (MPAA) rules.

Question 23

UFPLS and the LTA - pre 75

Answer 23

A member below the age of 75 who takes a UFPLS will have the gross amount of the UFPLS tested against their LTA under BCE 6.

If the amount of UFPLS is greater than the member’s remaining LTA then they have the following choices:

• Reduce the amount of the UFPLS taken so that it is within the LTA.
• Take the lump sum they intended to take and receive the excess over the LTA as a LTA excess lump sum (and therefore pay a lifetime allowance charge of 55% on this part of the fund).
• Take a UFPLS up to their available LTA and then designate the remaining funds into a flexi-access drawdown pension. They will still have a lifetime allowance charge to pay but this time it will be at the income rate of 25%.

Question 24

UFPLS and the LTA - post 75

Answer 24

Where a member is aged 75 or over when they take a UFPLS they must have some of their LTA remaining.

If they do not have any of their LTA remaining they cannot receive a UFPLS. Instead, the full payment made will be taxed as pension income under PAYE

If the UFPLS falls within the member’s remaining LTA then they can receive 25% of the payment tax-free. If their remaining LTA is less than the UFPLS they wish to take they will not be able to receive 25% of the UFPLS tax free. Instead the tax-free portion of the UFPLS will be restricted to 25% of their remaining LTA.

Question 25

Lump Sums - Small pots payments

Answer 25

• Valued at £10k or less
• Max of 3 since 6 April 2015 (non occupational schemes)
• No limit on unconnected occupation schemes
• No LTA test
• No MPAA triggered

Question 26

Lump Sums - Small pots payments - tax situation

Answer 26

• 25% of the payment received will be tax free for uncrystallised funds, the remainder taxed as the member’s pension income under PAYE.
• The entire payment (100%) will be taxed as the member’s pension income under PAYE if a small pots payment is made in respect of crystallised benefits.

Question 27

Lump Sums - Trivial commutation lump sum

Answer 27

If a member has benefits held in a defined benefit scheme and the value of their total pension benefits (across all arrangements) does not exceed the commutation limit of £30,000, the benefits from the defined benefit scheme may be paid as a cash lump sum rather than as income.

The main rules that apply to trivial commutation lump sums from 6 April 2015 are as follows:

• Only a defined benefit scheme pension can be commuted;
• The value on the nominated date (the date on which all the member’s pensions are valued) of ALL pension rights (whether pre-A-Day, uncrystallised or crystallised, but excluding small pots that have already been taken) must not exceed £30,000;
• The member must have reached the minimum pension age or they must have reached their protected pension age or satisfy HMRC ill-health conditions;
• The member must have some available lifetime allowance;
• Commutation must be completed within a 12-month commutation period;
• The lump sum payment must extinguish the member’s entitlement to defined benefits under the registered pension scheme that is making the payment.
• If the member does not start to commute their benefits within three months of the nominated date they can choose another nominated date and start the process again.

Question 28

Lump Sums - Triviality - Commutation period

Answer 28

• This 12-month commutation period starts when the first commutation payment is made
• An individual can only have one commutation period in their lifetime, so if they have rights in multiple registered defined benefit pension schemes, but does not commute them all within the commutation period, those rights will not be able to be commuted later.

Question 30

Triviality Tax situation

Answer 30

Therefore, if the benefits in the defined benefit scheme have not been crystallised:

• 25% of the payment received will be tax free.
• 75% of the payment will be taxed as the member’s pension income under PAYE.

If a trivial commutation lump sum is being made in respect of a scheme pension in-payment the entire payment will be taxed as the member’s pension income under PAYE.

Question 31

Lump Sums - Serious ill-health commutation

Answer 31

Registered pension schemes can commute all a member’s uncrystallised (or unused) benefits

in circumstances of serious ill-health. This is subject to certain conditions being satisfied.

For benefits to be commuted for a serious ill-health lump sum, the member must have some LTA remaining. The tax treatment of a serious ill-health lump sum can be summarised as follows:

• where the member is under the age of 75 the payment is made tax-free up to the LTA;
• any payment made to a member under the age of 75 in excess of the remaining LTA, is subject to a lifetime allowance tax charge of 55%; and
• where the member is 75 or over, the entire serious ill-health lump sum will be subject to income tax as pension income, in other words PAYE.

Question 32

MEMBER BENEFITS - INCOME

Answer 32

This applies to DB and DC

The options are a:

• secured pension; and / or
• drawdown pension (used to be known as unsecured income).