RPSM03105612 - Technical Pages: Protecting pension rights from tax charges: Lump sums: Scheme specific protection: Example - defined benefit arrangement
Note: This example is based on events which took place before the law change as at 6 April 2012, so the rules prevailing then apply (see RPSM03105580). The approach used below does not work for calculations for dates on or after 6 April 2012. These would need adaptation for the way ALSA changes and also if a member has Fixed Protection - see the examples at RPSM03105590.
Example of payment from a defined benefits pension arrangement
On 5 April 2006 Helen has rights in a defined benefits arrangement of a pension of £10,000pa (uncrystallised value is £10,000 x 20 = £200,000) and a commuted lump sum right of £100,000. These benefits are within the HMRC maximum permitted pension and lump sum limits. So
VULSR = £100,000; VUR = £200,000
Helen’s benefits come into payment on 1 July 2008 when the standard lifetime allowance is £1.65 million. By this time Helen’s pension has increased to £21,000pa. The scheme uses a lump sum commutation factor of 12:1.
The pre 6 April 2006 rights have now increased as follows
VULSR = £100,000 x £1.65 million/ £1.5 million = £110,000
VUR = £200,000 x 1.65/1.5 = £220,000
To calculate the maximum allowable pension commencement lump sum Helen’s scheme administrator has first to calculate the value of the ALSA lump sum. The total benefits crystallised will be
[Gross pension - (lump sum/ scheme commutation factor)] x 20 + lump sum
= [£21,000 - lump sum/12] x 20 + lump sum
= (£21,000 x 20) - (lump sum/12 x 20) + lump sum
= £420,000 - (20/12) lump sum + (12/12) lump sum
= £420,000 - 2/3 x lump sum
Total benefits crystallised = £420,000 - 2/3 x lump sum
The post 5 April 2006 increase in the value of benefits is [total benefits crystallised - VUR (revalorised)]
= £420,000 - 2/3 x lump sum - £220,000
= £200,000 - 2/3 x lump sum
The maximum lump sum in respect of the post 5 April 2006 benefits (ALSA) is
LS + AC/4 (where LS + AC = £200,000 - 2/3 x lump sum)
= £200,000 x 0.25 - (2/3 x lump sum) x 0.25
= £50,000 - 1/6 x lump sum
The maximum pension commencement lump sum (PCLS) = VULSR (revalorised) + the lump sum in respect of post 5/4/06 benefit increase (ALSA) Max PCLS = £110,000 + (£50,000 - 1/6 x lump sum)
Max PCLS = £137,143
After taking this lump sum the crystallised value of residual pension will be
(£21,000 - £137,143/12) x 20 = £191,428
This result can be checked against the legislative formula
| VULSR x CSLA/FSLA + | LS + AC - (VUR X CSLA/FSLA) |
| 4 |
= £110,000 + ({£137,143 + £191,428 - £220,000}/4)
= £110,000 + (£108,571/4)
= £110,000 + £27,143
= £137,143
| Glossary (RPSM20000000) |
