RPSM09102310 - Technical Pages: Member benefits: An unsecured pension: Limit on unsecured pensions

This guidance only covers members who became entitled to an unsecured pension before 6 April 2011. If the member became entitled to their pension on or after 6 April 2011 then see the guidance at RPSM09103500.

Limit where an entitlement to an unsecured pension first arises under an arrangement

Maximum amount

The maximum level of unsecured pension that may be paid from an unsecured pension fund is calculated at the point the member first becomes entitled to such a pension, i.e. when they first designate some of the uncrystallised funds held in the arrangement to be used to provide an unsecured pension.

The maximum amount is 120% of a basis amount calculated at that point. RPSM09102330 explains what the basis amount is.

This limit caps the aggregate level of unsecured pension that can be paid, or secured through short-term annuity contracts, from the unsecured pension fund.

Pension years and reference periods

This maximum applies for a 12 month period starting from the date entitlement to unsecured pension first arises under that arrangement, and subsequent 12 month periods following that period, until a review of those limits is triggered. These 12 month periods are called ‘unsecured pension years’ in the legislation, but are referred to here as pension years.

RPSM09102320 gives an example of how pension years are set. Once set, these pension years will not change.

A review of the maximum unsecured pension payable is triggered under an arrangement no later than five years after the initial calculation point, and no later than at five yearly intervals thereafter (so at the beginning of the sixth pension year, eleventh pension year etc.). These five yearly groups of pension year are referred to in the legislation as ‘reference periods’. As the pension year structure does not change, the revised limit will simply replace the existing limit for the current and/or future pension years within the existing reference period.

However providing the scheme administrator agrees, the member may request that an earlier review of the basis amount is carried out before the end of the current five year reference period. If this occurs a new five year ‘reference period’ will commence from the beginning of the pension year following the request and the previous reference period expires. See RPSM09102520 for further details.

RPSM09102410 explains what other circumstances trigger a review of this limit.

Minimum amount

There is no requirement for a minimum amount of unsecured pension to be paid in a pension year.

Responsibility of the scheme administrator

The scheme administrator is responsible for ensuring that the maximum limits are not exceeded in the first and subsequent pension years, and for reviewing this maximum limit as and when required.