Q: What is a benefit crystallisation event?
A: A ‘benefit crystallisation event’, or BCE, is the official term for an action or event which triggers a test against the lifetime allowance. The most common BCEs take place when people access their pension benefits, or at age 75 if they haven’t accessed their benefits by that age. Therefore BCEs most often take place between age 55 and 75.
However, BCEs can take place before age 55 (for example, if someone dies before that age, or transfers his or her pension overseas), and there is one, related to growth in a scheme pension, which can take place after age 75.
Q: How many BCEs are there?
A: There are currently 13 separate BCEs. There were nine originally, with four more being added due to rule changes over the years. Some of the BCEs are incredibly specific: for example, there are three separate BCEs for testing death benefits, depending on whether the funds will be taken as a lump sum, drawdown, or an annuity. PCLS (tax-free cash) is also tested under a separate BCE from drawdown or an annuity purchase, so when people access pension benefits they will most often trigger two BCEs at once.
Q: What is actually being tested at each benefit crystallisation event (BCE)?
A: Each BCE has its own definition of the value which should be tested against the lifetime allowance. The main distinction is that some BCEs test ‘the amount of’ the benefits in question, and others test ‘the aggregate of the amount of’ any sums and the market value of any assets.
The former tends to be for BCEs where there is a tangible amount being accessed which can be tested; for example, a PCLS (tax-free cash) payment, or an uncrystallised funds pension lump sum (UFPLS). The latter tends to be for BCEs where funds are being tested without necessarily being accessed, such as a drawdown designation or a transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS).
In practical terms, this distinction can determine whether or not a full valuation of a pension is needed ready for a BCE. For example, if a client is taking a UFPLS from part of their pension, strictly speaking the provider only needs to test the value of the UFPLS payment itself, and may not require a valuation of the remaining pension. A valuation could still be required if, for example, the pension was already partly crystallised, and the provider needed to be confident that the uncrystallised portion of the pension could support the UFPLS.
On the other hand, if the BCE taking place is one such as a drawdown designation where assets are remaining in place, the provider is required to test the market value of those assets against the lifetime allowance. The ‘market value’ is further defined as the price the assets might reasonably expect to achieve on the open market. Different providers may have different policies for determining the market value of the assets.
Jessica List is pension technical manager at Curtis Banks