PSI25.3.9 - Flexibility in Pension Provision – Flexible Use of AVCs - Maximum Limits on Benefits from all Sources

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

Subject to PSI25.3.10 total benefits from different schemes must not exceed the Inland Revenue limits for approved retirement benefits schemes. However there will be changes in the timing of checks for keeping within limits. Whether AVC benefits are taken earlier than employer funded benefits, at the same time, or deferred until after the employer funded benefits are paid, the limits check is carried out at the employer funded benefit date.

Where AVC benefits are taken before employer funded benefits, the limits check is deferred to the time employer funded benefits are first drawn. The AVC benefits should be brought into account for the purposes of the maximum benefits limits check at their current value.

For members who:

• are not controlling directors, and
• whose annual earnings at any time after age 50 have not exceeded 1/2 the permitted maximum (determined at its level in the year in question)

The current value should be determined by calculating the annuity which could be purchased (using GAD tables) at the date the employer funded benefits come into payment with the remaining AVC fund. This calculation should be made after deducting any retirement lump sum paid from those AVC funds at the time of payment of the employer funded benefits. The annuity value of any deducted lump sum as determined by the appropriate commutation factor (see PSI part 8) should then be brought back into consideration.

For members who are controlling directors and those whose annual earnings at any time after age 50 have exceeded 1/2 the permitted maximum (determined at its level in the year in question), the current value is the annuity which could be purchased (using GAD tables) at the date employer funded benefits come into payment, with the sum of:

• The remaining AVC fund (after deducting the retirement lump sum, if any, paid from those AVC funds at the time of payment of the employer funded benefits), and
• The aggregate of the amount of AVC pension drawn in the period up to employer funded benefits being taken.

The annuity value of any deducted lump sum as determined by the appropriate commutation factor (see PSI8) should then be brought back into consideration.

Note that:

• the 'annual earnings' should be interpreted as earnings in any tax year and can be quantified as any emoluments which are chargeable to tax under Case I or II of Schedule E other than those items specifically excluded by section 612(1) ICTA 1988.
• the annuity that could be purchased is calculated by reference to the GAD tables for a single life basis only and assuming 100% income drawdown.

Where the AVC benefits are deferred beyond the date that employer funded benefits come into payment , the fund underlying the AVC benefits at the date the employer funded benefits are paid, (after deducting any lump sum benefit paid from the AVC funds at that date, should be turned into its pension equivalent. For this purpose, the AVC pension must be valued by use of the GAD tables for a single life basis only and assuming 100% drawdown. Any lump sum benefit taken from the AVC fund should be taken into account.