RPSM09102420 - Technical Pages: Member benefits: An unsecured pension: Review of the unsecured pension limit: 5 year review

Five year formal review of unsecured pension limits

A review of the unsecured pension limit must be carried out at least every five years, in which case it will take place on the first day of the sixth pension year, then the first day of the eleventh year etc. This will happen until the earlier of

• the scheme administrator agreeing to the member’s request for an earlier review date (see RPSM09102520)
• the entire unsecured pension fund being used to buy a lifetime annuity or provide a scheme pension,
• the member reaching age 75, or
• the member’s death.

The point at which this five-yearly formal review must be carried out is referred to in the legislation as the ‘reference date’ for review. The five year period a formal calculation applies to is called a ‘reference period’. So until one of the four above events occurs the first reference period is the first to fifth pension years, the second reference period the sixth to tenth pension years and so on.

A more frequent review of the unsecured pension limit is only triggered in four situations:

• the first is where the scheme administrator agrees to the member’s request for an earlier review date. If this occurs then the existing five-year reference period ends and a new one begins (see RPSM09102520).
• secondly, where a lifetime annuity contract is purchased from part of the unsecured pension fund or part of that fund is applied to provide a scheme pension.
• thirdly, where the unsecured pension fund is reduced following the application of a pension sharing order, or
• finally, where there is an additional fund designation.

A review will not disrupt the existing pension year structure. The dates the existing and later pension years end and begin will not change.

Just as the pension years remain unchanged, the timing of the five year reference period will also normally remain unchanged. Only in cases where the first bullet applies, i.e. where the scheme administrator agrees to the member in arranging an earlier review will the timing of the five year reference periods change.

So in the case of the last three of the bullets above, reviews will not change the timing of the formal review due at the end of the five-year reference period. The five-yearly review will still take place on the reference date of the first day of the sixth, eleventh etc. pension year. All that happens is that the existing limits for the remaining pension years in that five-year reference period (and the current year where there is an additional fund designation) may be replaced with a revised limit that will apply up until the next formal review at the beginning of the next five- year reference period.

Where a five yearly review is due, the scheme administrator may actually make the calculation within a 60 day window in advance of the due review date. This also includes the situation where the scheme administrator has agreed to the request of the member to carry out a review before the end of the current five-year reference period. However this 60 day window cannot be used where the review is being triggered through additional fund designation, lifetime annuity purchase/scheme pension provision or following a pension sharing order. Using the 60 day window does not change the date of the next reference date for review, or the date the current and following pension years fall between. The limit calculated during the 60 days window still only kicks in on the set reference date for review.

The scheme administrator re-calculates the new limit in exactly the same way as they did when initially making the initial calculation. They re-calculate the basis amount using the GAD tables, based on the net value of the unsecured pension fund and the individual’s age at that date (see RPSM09102330). The revised limit for the next five pension years is then set at 120% of the revised basis amount.

RPSM09102430 gives an example.