Taking an annuity from a flexi-access drawdown fund

[hiriskpaul]

Pre-2023 question - I know it has all changed!

If the LTA has been fully used and an annuity is purchased from a flexi-access drawdown fund, how is any BCE benefit and LTA charge calculated? It would seem deeply unfair if the BCE amount was the cost of the annuity as there may not have been any growth in the flexi-access fund.

Most info I have found does not adequately address this scenario, with most focussing on annuity purchase out of uncrystallised funds.

[SebsCat]

See https://www.gov.uk/hmrc-internal-manual ... /ptm088640

Looks like the amount used in the BCE is the amount used to purchase the annuity minus the element of that amount which has been previously tested under BCE 1. That page gives a couple of examples:

Example 1

Andy is aged 55 and has benefits worth £200,000 held in a money purchase arrangement. On 5 August 2013 Andy draws all his benefits, taking a pension commencement lump sum of £50,000 and using the remaining funds to provide a drawdown pension.

Two BCEs have occurred - BCE 1 for the designation of funds for a drawdown pension and BCE 6 for the provision of the pension commencement lump sum. A lifetime allowance test is triggered.

The amount crystallised through BCE 1 is £150,000 (i.e. what becomes a drawdown pension fund at that point). The amount crystallising through BCE 6 is £50,000. The scheme administrator calculates that the benefits taken represent 13.33per cent of the standard lifetime allowance (£1.5 million for that tax year).

On 5 August 2014, Andy decides to use all the drawdown pension fund to purchase a lifetime annuity contract. Andy has drawn very little drawdown pension and so his drawdown pension fund has grown to £180,000 at that time.

A lifetime allowance test is triggered through BCE 4 when the annuity contract is purchased. The amount crystallised is reduced by £150,000 to reflect the amount that crystallised previously through BCE 1 when the funds were originally designated to provide drawdown pension.

The amount crystallised is therefore only £30,000 (£180,000 - £150,000).

Example 2

As above, but the drawdown pension fund used to buy the lifetime annuity stands at £120,000 as Andy has been drawing a higher level of pension.

BCE 4 is triggered, but because the £120,000 notional amount crystallising through BCE 4 is reduced by the £150,000 that crystallised through BCE 1 in August 2013, on the creation of the drawdown pension fund that has been used to purchase the lifetime annuity, the £120,000 annuity purchase price is cancelled out. As nothing crystallises at that point Andy uses up no lifetime allowance on the purchase of the lifetime annuity.

[hiriskpaul]

Perfect thanks. Just what I was looking for.