RPSM06107040 - Technical Pages: Annual allowance: From 6 April 2011: Pension input amounts: Cash balance arrangement
Pension input amounts under a cash balance arrangement
[s230- s232 FA04]
The method of valuing pension savings to a cash balance arrangement is similar to that for defined benefits arrangements. The pension savings amount is the increase in the value of the member’s promised pension fund over the pension period. This is the difference between the value of the member’s promised pension pot at the start of the pension input period (the opening value) and the value of the promised pension pot at the end of the pension input period (the closing value). If the difference is a negative amount for a pension input period then the pension input amount for the arrangement is nil for that pension input period.
How to find the opening value
How to find the closing value
Adjustments to the closing value
If there has been a transfer into the arrangement in the pension input period
If there has been a transfer out of the arrangement in the pension input period
If there has been a pension debit in the pension input period
If there has been a pension credit in the pension input period
If there has been a BCE during the pension input period
If there has been a reduction in the member’s benefits rights in the pension input period because the scheme administrator has paid an amount of the member’s annual allowance charge for any tax year
How to find the opening value
This is a 2 step process.
Step 1
Find the amount of the promised pension fund that the member had immediately before the start of the pension input period. (This is the amount of built up promised pension fund that would be available to the member if the member retired at that time having already reached normal pension age and without any extra benefits for ill health. So, if the member took the benefits at that time, what would the member get without any adjustment for early payment? RPSM06107060 has more details on this aspect.)
Note, if it is the first pension input amount for the arrangement (i.e. the member’s benefits have started to build up for the first time under the arrangement) the opening value of the member’s promised fund is nil.
Step 2
Increase this amount by the 12 month increase in the CPI to the September before the start of the tax year for which the calculation is being done.
How to find the closing value
The closing value is the amount of the member’s promised pension fund at the end of the pension input period.
Adjustments to the closing value
Certain events can cause the closing value of the member’s benefits to be bigger or smaller than they would otherwise be. These events include where a transfer payment has been made or received by the pension scheme in relation to the member or, following a pension share (on divorce there is a pension debit or credit attached to the member’s benefits), or a benefit crystallisation event has occurred. In these circumstances an adjustment must be made to the amount of the closing value in the pension input period in which the event occurred, as shown below. (The most likely BCE is where the member starts to take some or all of their benefits from the arrangement.)
If there has been a transfer into the arrangement in the pension input period
Deduct the amount of the increase in rights available to provide benefits relating to the transfer from the closing value.
If there has been a transfer out of the arrangement in the pension input period
If the transfer is to another registered pension scheme or an overseas scheme that is a qualifying recognised overseas pension scheme add the amount of the reduction in rights available to provide benefits relating to the transfer to the closing value.
If the transfer is not to a registered pension scheme or a qualifying recognised overseas pension scheme there is no need to add back the reduction in rights relating to the transfer to the closing value. The transfer out is an unauthorised member payment.
If there has been a pension debit in the pension input period
Add the amount of the reduction in rights available to provide benefits relating to the pension debit to the closing value.
If there has been a pension credit in the pension input period
Deduct the amount of the increase in rights available to provide benefits relating to the pension credit from the closing value.
If there has been a BCE during the pension input period
Add the amount of the reduction in rights available to provide benefits relating to the BCE to the closing value. Do not do this if the BCE is a BCE 8 (transfer to a QROPS) as the closing value should already be adjusted for the transfer out. For a BCE 3 add in the whole amount of the increase in the earlier pension.
If there has been a reduction in the member’s benefits rights in the pension input period because the scheme administrator has paid an amount of the member’s annual allowance charge for any tax year
Add back the amount of the reduction in rights that relates to the adjustment made as a consequence of paying the amount of tax charge to the closing value.
Note, this add back is not made if the adjustment to the member’s rights to take account of an amount of tax paid relates to an amount of annual allowance charge that the member has elected to require a pension scheme to pay and that amount of tax is for the same tax year in which the member becomes entitled to all benefits under the pension scheme in question (RPSM06107091 has more details).
Example
Mark is a member of a cash balance arrangement. His pension promise is that his pension pot will be increased by 12 per cent of his pay each year with a minimum amount of £10,000.
Mark wants to work out what his pension saving is for the tax year 2011-12. Annual increase in CPI to September 2010 is taken as 3% for the purpose of this example.
At the start of his pension input period, Mark’s fund stands at £156,000. This amount is increased by 3 per cent to £160,680. This is Mark’s opening value.
Mark’s pay for the year was £82,000, 12 per cent of which is £9,840. This is less than the promised minimum increase to his pension pot, so £10,000 was added to Mark’s promised funds. This brings Mark’s closing value to £166,000.
Mark’s pension input is the difference between his opening value (£160,680) and his closing value (£166,000). Mark’s pension savings amount is £5,320.
If there have been any minimum payments because the arrangement is contracted out of the State Second Pension
Subtract from what would otherwise be the pension input amount for the pension input period the amount of any minimum payments made during the pension input period in relation to the individual in connection with the arrangement. These are minimum payments made under:
- section 8 of the Pension Schemes Act 1993, or
- section 4 of the Pension Schemes (Northern Ireland) Act 1993.
| Glossary (RPSM20000000) |
