RPSM11104230 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Scheme pension – BCE 2: Non-standard relevant valuation factor

A non-standard relevant valuation factor

The standard relevant valuation factor of 20 for valuing pensions coming into payment, is based on certain assumptions, one of which is that the pension being provided will not increase annually by more than 5% or the increase in the retail prices index. If scheme rules allow increases of more than this amount, and the usual relevant valuation factor of 20 is used, members are likely to fall within the scope of Benefit Crystallisation Event 3 (BCE 3) in the second and subsequent years of their pension (see RPSM11104310).

To avoid this, the Scheme Administrator may approach HMRC and negotiate a relevant valuation factor (RVF) of more than 20 where pensions increase by more than 5% per annum. Where a higher non-standard RVF of more than 20 is agreed, HMRC will also specify the relevant annual percentage that should be used for permitted margin purposes under the scheme, where dealing with an increase in a scheme pension entitlement under the scheme crystallising through BCE 3 (see RPSM11104350).

A higher RVF will mean more crystallises for lifetime allowance purposes when the entitlement to that scheme pension arises, but may prevent subsequent BCEs being triggered in future years through BCE 3, as and when increases are applied to that pension.

If a registered pension scheme wishes to use a RVF that is greater than 20 then they may do so provided they obtain HMRC agreement. HMRC cannot agree a RVF that is lower than 20, and nor will it agree a different factor for individual members. Any higher factor agreed must be applied to all BCE 2s occurring on or after the date of the agreement, under any arrangement held by any member under the scheme, in all circumstances.

The higher RVF and rate of increase do not apply to pensions which were crystallised prior to the agreement. For those pensions, any increase above the normal permitted margin, will continue to trigger a BCE 3.

Conditions for agreement

Under Section 276 (2) of Finance Act 2004, Scheme Administrators may by agreement with HMRC adopt a higher Relevant Valuation Factor (RVF) than 20. When a higher Relevant Valuation Factor (RVF) is agreed, HMRC will also agree the annual rate of increase in scheme pensions. Unless there are exceptional circumstances, HMRC will only agree to the adoption of a higher RVF if all of the following conditions are satisfied-

• The scheme has at least 20 members.
• The proposed rate of increase of pensions will apply to all members of the scheme who start to receive a pension on or after the date of the agreement.
• HMRC is satisfied that the proposed non-standard valuation factor accurately reflects the value of pension to be paid, and the proposed rate of increase.
• The proposal is not part of avoidance arrangements to increase the member’s entitlement to a lump sum on which there is no liability to tax.

Applications for HMRC agreement to adoption of a RVF factor greater than 20 must be made in writing by the Scheme Administrator or by an appropriately authorised practitioner to Audit & Pension Scheme Services (APSS), Yorke House, Castle Meadow Road, Nottingham, NG2 1BG. Applications should state

• the name of the scheme and its SF or PSTR reference
• the proposed higher RVF under Section 276 FA04
• the proposed annual rate under Schedule 32 paragraph 11(4)(a) FA04
• the number of members within the scheme, and
• include sufficient detail to enable APSS to establish that all of the above conditions have been met.

APSS may request further information before making a decision. If such information is not supplied within a time specified by APSS when making the request, the application will lapse.

When agreement is reached, APSS will confirm in writing the agreed higher RVF.

The letter will also specify the agreed relevant annual percentage rate of increase in scheme pensions, for the purpose of determining whether a Benefit Crystallisation Event 3 is triggered.

The agreed higher RVF and higher rate of increase will apply to all scheme pensions crystallised on or after the date of APSS agreement. The agreed higher RVF and higher rate of increases will not apply to scheme pensions or increases in pensions where the individual became entitled to that pension prior to the date of the agreement.

When APSS cannot agree a proposed higher RVF a written refusal will be issued, stating the grounds for refusal. There is no right of appeal against that refusal.