Facts: John has uncrystallised rights in a
retirement annuity contract with a value of £800,000 on 5
April 2006.
He also has uncrystallised rights in a retirement benefit
scheme of his current employer. He remains an active member of this
scheme, but for the purposes of this valuation he is deemed to have
left employment and pensionable service on 5 April 2006. He has
taken no pension or lump sum benefits from any tax privileged
schemes before 6 April 2006. His scheme holds a transfer value
received from a previous employer’s scheme. The transfer
value is a retained benefit and the lump sum payable from it is
determined by a lump sum certificate. At 5 April 2006 the maximum
lump sum payable is £60,000. John has pre 1987 rights in the
scheme, 20 years’ pensionable service, pensionable earnings
of £120,000, a normal retirement age of 60. He is 50 on 5
April 2006.
His rights under the retirement annuity contract are wholly
concurrent with his rights under the occupational scheme of his
current employer. The rights under the retirement annuity contract
are not retained benefits for the purposes of limits on his rights
under the occupational scheme.
Step 1: Calculate John’s lump sum rights
under paragraph 25 Schedule 36 Finance Act 2004.
John’s lump sum rights under the retirement annuity
contract are worth £200,000 (25% of the fund value of
£800,000).
John’s lump sum rights under the retirement benefit
scheme are calculated as follows
His lump sum rights from the transferred-in retained benefit are worth £60,000.
His lump sum rights for his current employment under the terms of the scheme rules are the greater of
His lump sum rights are therefore worth £120,000.
The calculations are carried out on the basis that John is aged
60 on 5 April 2006, because the valuation assumptions in paragraph
25(7) Schedule 36 Finance Act 2004 apply. His pensionable service
and pensionable earnings remain unchanged. The calculations take
account of his lump sum retained benefits and HMRC limits are
applied as if John had reached normal retirement age.
So his total lump sum rights are £380,000 (£200,000
under the retirement annuity contract and £60,000 plus
£120,000 under the retirement benefit scheme).
Step 2: Calculate John’s uncrystallised lump
sum rights under paragraph 26 Schedule 36 Finance Act 2004 (the
HMRC limit test). The calculation uses John’s final
remuneration, (£160,000) which is higher than the pensionable
earnings amount (£120,000) under the scheme rules.
His lump sum rights from the transferred-in retained benefit are unchanged at £60,000.
His lump sum rights for his current employment are the greater of
20/30 x (1.5 x £160,000 - £60,000) = £120,000.
His rights are worth £120,000.
The calculation uses John’s actual age on 5 April 2006.
The value for the lump sum retained benefit is taken as the amount
that could be paid on 5 April 2006. The value of the lump sum
retained benefit could also be calculated using the method shown in
the IR 12, “Occupational Pension Schemes Practice
Notes” see
RPSM03110000 to
RPSM03110250 in the version which
was current when the scheme was approved. For when retained
benefits must be taken into account and when they can be ignored,
see
RPSM03101590.
Step 3: Compare values for lump sum rights in
retirement benefit schemes under Step 1 and Step 2, and adjust as
required.
John's rights under Step1 were £60,000 plus
£120,000, and under Step 2 were £60,000 plus
£120,000. So no adjustment needs to be made to the value of
the lump sum rights under Step 1.
Summary: John’s uncrystallised lump sum rights (VULSR) are worth £380,000 (£200,000 and £60,000 plus £120,000).
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| Glossary ( RPSM20000000) |
