RPSM03101090 - Technical Pages: Protecting pension rights from tax charges: Valuing pension rights at 5 April 2006: uncrystallised rights - defined benefits arrangements

Uncrystallised pension rights: defined benefits arrangements

For defined benefits arrangements, the value of an individual’s uncrystallised rights on 5 April 2006 is the aggregate of

• 20 x the gross annual pension, and
• the value of any separate lump sum available under the arrangement. This includes any lump sum the individual became entitled to before 6 April 2006 that is deemed to crystallise on 6 April 2006 in accordance with article 28 The Taxation of Pension Schemes (Transitional Provisions) Order – SI 2006/572. See RPSM03101050.

In each case, the value is the amount that would have been available for the provision of immediate benefit, had the individual been entitled to receive it on 5 April 2006 - subject to two valuation assumptions.

The two valuation assumptions are that

1. the benefit should be calculated assuming the individual to be aged 60, unless a different age was specified under the arrangement on 10 December 2003 as the age at which no reduction would apply to the payment of an immediate benefit, in which case the individual should be assumed to be that age. Where the individual has already reached 60 or the age specified under the arrangement on 10 December 2003, the individual’s actual age on 5 April 2006 should be used when valuing the pension rights; and
   
   
2. the individual is deemed to be in good physical and mental health on 5 April 2006.

Example

Joan is a member of a defined benefits scheme with a non-uniform accrual rate of 1/40th of pensionable earnings for each year in the scheme. She has no other pension rights from earlier employments.

On 5 April 2006 she is aged 50, is still in pensionable service, has pensionable earnings of £90,000 and has completed 20 years pensionable service. On 10 December 2003, her normal retirement age under the scheme was 60.

For the purposes of the valuation under paragraph 8 Schedule 36 Finance Act 2004, she is assumed to be 60 and she has a pension of £45,000 (20/40 x £90,000) with a value of £900,000 (20 x £45,000).