RPSM09102340 - Technical Pages: Member benefits: An unsecured pension: Limit on unsecured pensions: Example of calculating the basis amount

An example showing how the basis amount is calculated

Barbara designates £100,000 of a money purchase arrangement to provide an unsecured pension from her 60th birthday (1st October 2007).

Step 1

Because this is the first designation from Barbara's pension arrangement the point of calculation is the date of designation: 1st October 2007. (Later 5 yearly reviews might use a 'nominated date', as RPSM09102440 explains.)

Step 2

The administrator obtains the yield (strictly a gross redemption yield) on UK gilts (15 years) from the FTSE UK Gilts Indices as published daily in the Financial Times for the 15th day of the calendar month preceding the month in which the point of calculation fell. i.e 15th September 2007. If the 15th day is a non-working day, the administrator has to go back to the nearest working day before the 15th in order to get a yield figure. The yield figures for any working day are expected to be published in the Financial Times on the following day. In this case the administrator has to look up the figure for Friday 14th September 2007.

Where the administrator is calculating the level of unsecured pension for a child or young person under the age of 23 the yield on UK gilts (5 years) should be used.

Step 3

The yield obtained in Step 2 turns out to be 4.37%. Because this is not a multiple of 1/4%, the administrator is required to round it down to the nearest 0.25% i.e. 4.25%.

Step 4

The administrator then has to look up the rate to use for calculating the basis amount using the GAD tables. GAD Table 1 is for men aged 23+ and GAD Table 3 is for children and young people under the age of 23. To get the figures to use for Barbara the administrator uses table 2. The table lists a 'basis amount' rate of £59 pension per £1,000 designated for a 60 year old and a gilt yield of 4.25%.

Step 5

The basis amount is calculated as: [the amount of the unsecured pension fund/£1,000] x the yield basis amount rate from step 4:

£100,000/£1,000 x £59 = £5,900.00

Step 6

The administrator confirms that the result does not need to be rounded down to the nearest penny in this case, as the result is already a whole number of pence.