Currently, there are 13 benefit crystallisation events. Jessicca List, pension technical manager at Curtis Banks, gives a brief introduction to each.
Originally, there were nine separate benefit crystallisation events (BCEs) defined in the legislation, but they’ve been added to over the years as the rules have changed. Some are incredibly specific and others unusually broad; some are extremely common and others you may never encounter.
BCE 1 – drawdown designation
The first BCE is one of the most common under current rules. It’s important to note that this BCE rarely occurs alone, because it doesn’t include the PCLS (tax free cash) amount, which comes later in its own BCE. The amount being crystallised is the total of the ‘sums and the market value of the assets’ being put into drawdown: providers will often complete a valuation to determine the market value of the assets to ensure the BCE is completed accurately. BCE 1 can only take place before age 75.
BCE 2 – scheme pension
A person becoming entitled to a scheme pension will trigger BCE 2. Like BCE 1, this won’t include any PCLS entitlement. The amount tested is the amount of pension payable in the first year, multiplied by the ‘relevant valuation factor’, which is normally 20. BCE 2 can only take place before age 75.
BCE 3 – scheme pension increases
If the amount paid by a scheme pension in payment increases above a certain level, this will trigger a BCE 3. BCE 3 is the only one which can occur after an individual’s 75th birthday.
BCE 4 – annuity purchase
BCE 4 functions similarly to BCE 1, but for funds being used to purchase an annuity. It also doesn’t include PCLS and can only take place before age 75. The amount being tested is also the same as BCE 1: the value of the sums and market value of the assets being applied to the annuity purchase.
BCE 5 – defined benefits at age 75
This is the first of the BCEs which can occur at age 75. It’s probably the most unusual, as most people with a defined benefit pension will have begun to access it before age 75. If they haven’t, however, BCE 5 will test the funds on their 75th birthday. The amount tested is the annual amount the person would be entitled to if they started taking the pension on their 75th birthday, multiplied by the relevant valuation factor (normally 20), plus any lump sum amount the person would be entitled to (other than by commutation of pension).
BCE 5A – drawdown funds at age 75
If a drawdown arrangement has increased in value by age 75 above the amount originally designated to drawdown, the excess is tested through BCE 5A. Remember that these BCEs don’t include the PCLS amount, so it is only the increase in the amount actually put into drawdown which is tested. BCE 5 does not cover funds which were originally crystallised before 6 April 2006 (A-day).
BCE 5B – money purchase at age 75
If a person has any uncrystallised funds left in a money purchase pension at age 75, they are tested through BCE 5B. Although the funds will have been tested against the lifetime allowance, strictly speaking they don’t become crystallised funds, as the benefits still haven’t been accessed. Instead they are classed as ‘unused’ funds, and can still be accessed at a later date.
BCE 5C – beneficiaries’ drawdown
If a person dies before age 75 with uncrystallised funds and the death benefits are distributed within two years, the funds will be tested against the deceased’s lifetime allowance. BCE 5C occurs when such funds are designated to a drawdown account for the beneficiary. Like BCE 1, this BCE tests the value of sums and the market value of any assets designated. This BCE applies to death benefits settled from 6 April 2015 onwards.
BCE 5D – beneficiaries’ annuity
This BCE occurs in the same circumstances as BCE 5C, but where the beneficiary is purchasing an annuity. This BCE also only applies if the annuity is purchased from 6 April 2015 onwards, and additionally only if the individual died on or after 3 December 2014.
BCE 6 – relevant lump sums
This is one of the surprisingly broad BCEs, covering four different types of lump sum pension payments: PCLS (tax free cash), serious ill-health lump sums, uncrystallised funds pension lump sums (UFPLS), and lifetime allowance excess lump sums. Despite the different rules and taxation which apply to each of those lump sums, they are all tested using BCE 6. In each case, the amount being tested is simply the value of the lump sum being paid to the recipient. BCE 6 can only occur before age 75.
BCE 7 – lump sum death benefits
Lump sum death benefits are tested against the lifetime allowance in the same circumstances as BCE 5C and 5D. Like BCE 6, it’s simply the amount of the lump sum paid which is tested.
BCE 8 – QROPS transfers
If a person transfers to a qualifying recognised overseas pension scheme (QROPS) before their 75th birthday, the value of the sums and assets transferred will be tested using BCE 8. This prevents people from building up funds in UK registered pension schemes with the associated tax advantages, and then transferring the pension overseas to avoid the lifetime allowance when accessing the benefits.
BCE 9 – miscellaneous
BCE 9 is probably the least used – a set of regulations prescribes different circumstances in which it can apply. It covers very niche situations, such as certain payments made in error which are still authorised payments, and certain payments made after a person’s death. In each case there are very specific conditions to be met; a BCE 9 is not an everyday occurrence.
As you can tell from this introduction, the BCE legislation is broad in some areas, but incredibly specific in others.
BCEs affect everyone, including clients who aren’t concerned about reaching or exceeding the lifetime allowance.
The good news is that for BCEs which occur during a client’s lifetime, the scheme administrator will complete the BCEs and deal with any lifetime allowance charges which arise. However, it’s still important for all clients to understand which BCEs they are incurring and how this may affect the processes they are completing. I hope that this has provided a useful overview.