RPSM09102470 - Technical Pages: Member benefits: An unsecured pension: Review of the unsecured pension limit: Example of a review on purchasing an annuity

An example of a review of the unsecured pension limit where an annuity purchase occurs

John takes part of his benefits under his money purchase arrangement on 1 January 2008 as an unsecured pension. His unsecured pension fund is valued at £140,000. 

As well as testing the benefits coming into payment against John’s lifetime allowance, the scheme administrator calculates the maximum unsecured pension that can be drawn for the next five pension years (the first reference period).

The scheme administrator finds the basis amount using GAD tables. This comes to £10,000. So the maximum unsecured pension that can be paid is £12,000 (120% of £10,000). This limit applies for the first five pension years (the first reference period), running from 1 January 2008 to 31 December 2012.

The first formal review is due on 1 January 2013 (with the calculation being carried out on a nominated date between 2 November 2012 and 1 January 2013). This revised limit will then apply to the (sixth) pension year running from 1 January 2013 to 31 December 2013 and for the rest of the second reference period.

On 1 February 2010, John’s unsecured pension fund stands at £90,000. He decides to use £50,000 of that fund to purchase a lifetime annuity contract. This triggers a review of the unsecured pension limits. This limit will be applied to the remaining pension years in the current reference period, as they stand, but not to the pension year in which the annuity is purchased.

The scheme administrator calculates a revised basis amount as at 1 February 2010 using the GAD tables, based on the reduced unsecured pension fund of £40,000 after the purchase of the lifetime annuity contract and John’s age at that point. The 60 day window for the calculation cannot be used.

The revised basis amount is calculated at £4,000 per annum, giving a new maximum of £4,800 per annum (4,000 X120%).

The maximum for the current pension year where the purchase took place (1 January 2010 to 31 December 2010) is not altered. This remains at £12,000. But the existing maximum for the next two pension years, running from 1 January 2011 to 31 December 2011 and 1 January 2012 to 31 December 2012 is replaced by the new revised maximum of £4,800 per annum, as calculated on 1 February 2010.

On 1 January 2013 a formal five-year review will take place as normal at the beginning of the next reference period. The revised maximum calculated then applies for the next five pension years (the next reference period). The scheme administrator may make the calculation in a 60 day window ending on the 1 January 2013.