Facts: Sam has uncrystallised rights in a
personal pension with a value of £1.3 million
on 5 April 2006. She also has uncrystallised rights in a
retirement benefit scheme of her current employer.
She has 1989 rights in the scheme. At 5 April 2006, she has 15
years’ pensionable service and pensionable earnings of
£105,600 (due to the ‘earnings cap’ which is lower
than her actual salary of £175,000). Her normal retirement
date is 5 April 2010. The personal pension benefits are not a
retained benefit as they relate to a wholly concurrent employment.
Step 1: Calculate Sam’s lump sum rights
under paragraph 25, schedule 36 Finance Act 2004.
Sam’s rights in the personal pension are worth
£1.3 million but £50,000 of these are
protected rights which cannot be paid as lump
sums. Her uncrystallised lump sum rights are therefore 25% of
£1,250,000, giving £312,500.
Her uncrystallised lump sum rights in the retirement benefit
scheme are the greater of
She has
money purchase rights in the scheme valued at
£700,000 on 5 April 2006. This is the value determined by
paragraphs 8 and 9 schedule 36 Finance Act 2004. To determine the
amount of annual pension payable from the scheme, the capital value
(£700,000) could be divided by 20, or an annuity rate taken
from the
GAD tables on 5 April 2006 could be applied to the
capital value. In this example, the divisor of 20 is used giving an
annual pension of £35,000. Multiplying the pension by 2¼
gives £78,750 which is the greater lump sum of the two
calculations above.
Step 2: Calculate Sam’s uncrystallised lump
sum rights under paragraph 26 schedule 36 Finance Act 2004 (the
HMRC limit test).
In this instance the calculation of the rights in the
retirement benefit scheme is the same as at Step 1.
If the GAD tables had been used to determine the annual
pension payable, the calculations at Step 1 and 2 may have produced
different results. If the valuation assumption in paragraph 25(7)
schedule 36 Finance Act 2004 applied, Sam would be deemed to be 60
(her normal retirement age) and that age would have been used in
Step 1 for the GAD calculation. Her actual age (55) would be used
for the GAD calculation at Step 2.
Where the lump sum value requires an annual pension figure,
the same method (GAD table or divisor of 20) must be used in Steps
1 and 2. If the pension is a
defined benefit pension the divisor of 20 must be
used.
Summary - Sam’s uncrystallised lump sum rights are
£391,250 (£312,500 plus £78,750).
| Glossary ( RPSM20000000) |
