RPSM03301030 - Scheme Administrator Pages: Protecting pension rights from tax charges: Valuing pension rights: Uncrystallised rights – defined benefits

Valuing uncrystallised rights - defined benefits arrangements

The value of the pension rights is 20 times the annual pension (before commutation) which the member would have been entitled to receive had they acquired the right to payment on 5 April 2006.

Where an individual has the right to a separate lump sum (typically in a public sector scheme) then the value of the individual’s pension rights will be the total of two figures

• the annual rate of pension multiplied by 20, and
• the tax-free lump sum due without commutation

The valuation should be carried out assuming that

• the individual has reached age 60 unless a different age was set out in the terms of the arrangement as they stood 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
• the individual is deemed to be in good physical and mental health on 5 April 2006.

gives an example.

Where the arrangement is in an occupational pension scheme a further calculation must be done to ensure that the individual is not given protection for benefits above HMRC limits – see RPSM03301070.

The types of pension scheme where this further calculation for HMRC limits needs to be made are;

1. a retirement benefits scheme approved under Chapter I Part 14 ICTA 1988
   
   
2. a scheme formerly approved under section 208 ICTA 1970
   
   
3. a relevant statutory scheme (as defined in section 611A ICTA 1988) or a scheme treated by HMRC as if it were a relevant statutory scheme, and
   
   
4. a deferred annuity contract (section 32 policy) entered into in relation to (a) to (c) above inclusive.

If the calculation for HMRC limits gives a lower value it is the lower amount that is protected.