RPSM11104343 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension - BCE3: The threshold annual rate: The relevant indexation percentage
| [s216(1)][Para 10A, Sch 32] |
When the annual rate of a scheme pension being paid to a pensioner member is increased there will not be a lifetime allowance test through BCE 3 if the increase does not exceed the ‘threshold annual rate’. See RPSM11104341 for more details about the threshold annual rate.
One of the tests to decide whether or not the threshold annual rate has been exceeded is to determine if the increase to a scheme pension in payment has exceeded the ‘relevant indexation percentage’.
The relevant indexation percentage is the increase in the RPI for the period which ended with the ‘reference month’ and began with the same calendar month as the reference month in the preceding year.
The ‘reference month’ is any month chosen by the scheme administrator that is within the period of 12 months ending with the month in which the pensioner member became entitled to the scheme pension at the increased rate. So for a pension increase in December 2009 the scheme administrator may select a month as far back as January 2009 as the reference month.
The percentage should be rounded up to one decimal place (as this is consistent with how the RPI tables - RP02 - work and the table can be downloaded from www.statistics.gov.uk/rpi).
The relevant indexation percentage can never be lower than 0%.
Also, a further amount can be added on the increase by reference to the relevant indexation percentage to allow for rounding up (see RPSM11104345).
Example
Arnold is in receipt of a scheme pension of £10,000pa on 31st May 2008. On 1st June 2008 Arnold becomes entitled to receive his pension at an increased annual rate of £10,640pa. Despite the increase to Arnold’s pension being greater than £250 (see RPSM11104341) and the ‘relevant percentage rate’ (Arnold’s pension has been increased by more than 5% - see RPSM11104342), the threshold annual rate has not been exceeded as the annual rate of Arnold’s pension on 1st June 2008 has not exceeded the ‘relevant indexation percentage’.
To determine if the relevant indexation percentage has been exceeded, the increase in the rate of Arnold’s scheme pension was measured by reference to the increase in the RPI between April 2007 and April 2008 - April 2008 being the ‘reference month’ chosen by the scheme administrator. The RPI figures for these two months are 190 and 202 respectively (note - these figures are estimated and used for illustrative purposes only). The percentage rise in the RPI over the period is calculated as follows:
Applying the relevant indexation percentage to Arnold’s scheme pension of £10,000pa gives an amount of £10,640 (£10,000 + £640). As Arnold’s pension has been increased to this same amount the threshold annual rate has not been exceeded and no BCE 3 test is required in respect of that increase.
Allowing the scheme administrator to choose the reference month allows for RPI increases to be awarded in a particular month that is based on an earlier period as the very latest RPI figures may not be available for the month in which the increase is awarded. For example, if the pension increase is awarded every June the RPI figure for that June may not be available and so the increase can be based on an earlier period, say from April to April, provided the chosen reference month ends within the period of 12 months ending with the month in which the increase to the scheme pension occurs.
The reference month can be chosen each time the threshold annual rate is tested against and there does not need to be a consistent period between it and the month in which the increase is awarded.
| Glossary (RPSM20000000) |
