BCE4 Buying an Annuity

When an annuity is bought, the process for lifetime allowance check is:

1. Find the total of all amounts designated to drawdown funds in past BCEs (ignore lump sums, TiDs and deemed BCEs) = ‘original fund value’

2. Find current value of the normal drawdown fund

3. If annuity is being bought with whole of normal drawdown fund, find the increase in the fund value = annuity cost – original fund value = LTA used.

4. If LTA used is negative then store a new BCE with zero amount, include a comment to explain

5. If LTA used is positive then store the extra amount as a new BCE.

6. There will only be a tax charge if the new BCE amount takes the ‘total LTA used’ to over 100% and the member does not have protection.

7. The BCE still has to be recorded even if the member has protection.

8. The BCE amount is not taken into account in the fund split because no funds move, unless a tax charge is suffered.

9. If only part of the normal drawdown fund is used for the BCE, then part of the original fund value has to be allocated to the annuity. The part of original fund used = original fund value x annuity cost / total current normal drawdown fund. The LTA used = annuity cost – part of original fund value used. You need to keep records of the part of the original fund used for future (partial) annuity purchases.

10. Records of the calcs can be pasted into the Workings of the BCE record

11. The details can be found in RPSM. In 2009, the page was RPSM11104540, which links to examples.

12. If an annuity is bought from a TiD fund then you need to replace the above calculations with amounts relating to that TiD – ignore other TiDs and the normal drawdown fund

13. If an annuity purchase price includes funds from different arrangements then it needs to be allocated between them (pre 2006, normal and TiDs) and then separate calculations are needed for each arrangement

14. The drawdown limit has to be recalculated following a partial annuity purchase – the Pension Analysis program can be used to calculate and store the new limits.

This is separate from the percentage of the LTA that is transferred to the annuity provider.

The same principles apply to BCE5A, when a member reaches age 75 with drawdown funds.

LTA = Lifetime Allowance

See also - Vesting Events and Fund Splits