RPSM11104346 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension - BCE3: The threshold annual rate: Increase awarded within 12 months of becoming entitled to a scheme pension
| [s216(1)][Para 10A, Sch 32] |
One of the features of the ‘threshold annual rate’ test is that when the annual rate of a scheme pension in payment is increased on a particular date (the increase date) that increased annual rate is compared with the annual rate of pension that was being paid on what was the previous anniversary date 12 months earlier than the increase date.
For example, if a pensioner member receiving a scheme pension becomes entitled to receive that pension at a higher rate on 1st June 2008, the increased annual rate of pension is compared with the annual rate of pension that the member was entitled to on 1st June 2007 as part of the threshold annual rate test. See RPSM11104341 for more details.
However, it is possible that the provisions of a particular registered pension scheme might mean that annual increases are awarded to all scheme pensions in payment at the same time and so a pensioner member might receive an increase within the next 12 months of first becoming entitled to the payment of a scheme pension. Such a member would not have been in receipt of a scheme pension on the previous anniversary of the increase date.
The threshold annual rate test, therefore, allows for the possibility that increases might be awarded to scheme pensions that have been in payment for a period of less than 12 months at the time the increase is awarded. It does this by treating the date that the member first became entitled to the pension as if it were the previous anniversary date of the increase date and then increasing the pension from that start date by the greatest of:
- the relevant percentage rate (see RPSM11104342),
- the relevant indexation percentage (see RPSM11104343), and
- £250 (or such other amount that may be made by an order of HM Treasury) see RPSM11104344
as rounded up (see RPSM11104345).
Note that a pro-rata of the relevant percentage rate (5% or such greater amount if a relevant valuation factor of greater than 20 has been agreed) is not required when the member has been in receipt of the pension for a period of less than 12 before the increase is awarded. This is in contrast to the test for the ‘permitted margin’ when a pro-rata is required (see RPSM11104390 for more details).
Example 1
Arnold becomes entitled to his scheme pension of £10,000pa on 2nd June 2007. On 1st June 2008 Arnold’s pension is increased along with the scheme pensions in payments for all of the other pensioner members of the scheme. All pensions are increased by £250. Arnold becomes entitled to receive his pension at an annual rate of £10,250pa (£10,000 + £250).
Arnold was not entitled to any payment of scheme pension on 1st June 2007 - what was the previous anniversary date of the increase date of 1st June 2008. Instead, the increased annual rate of Arnold’s pension is compared with the pension Arnold was entitled to when he first became entitled to actually receive it - £10,000pa on 2nd June 2007. The threshold annual rate has not been exceeded as the annual rate of Arnold’s pension on 1st June 2008 has not exceeded £250 (£10,250 - £10,000 = an increase of £250) and no BCE 3 test is required in respect of that increase.
For the purpose of this example it is assumed that increases by reference to the relevant percentage rate and the relevant indexation percentage would have given lesser amounts of increases and that no rounding up has occurred.
Example 2
Arnold first becomes entitled to his scheme pension of £10,000pa on 1st December 2007. On 1st June 2008 Arnold’s pension is increased along with the scheme pensions in payment for all of the other pensioner members of the scheme. All pensions are increased by 5%. Arnold becomes entitled to receive his pension at an increased annual rate of £10,500pa (£10,000 + 5%).
Arnold was not receiving any scheme pension on 1st June 2007 - the previous anniversary date of the increase date of 1st June 2008. Instead, the increased annual rate of Arnold’s pension is compared with the pension Arnold was entitled to when he first became entitled to actually receive it - £10,000 pa on 1 December 2007. Despite the increase exceeding £250, the threshold annual rate has not been exceeded as the annual rate of increase in Arnold’s pension on 1st June 2008 has not exceeded 5% (£10,500 - £10,000 = an increase of 5%) and no BCE 3 test is required in respect of that increase. Even though Arnold’s pension has only been in payment for 6 months, no pro-rata of the 5% allowance is required.
On 1st September 2008 the annual rate of Arnold’s pension is increased again from £10,500pa to £11,025pa. The latest increase date is 1st September 2008 but on the previous anniversary date of the latest increase date (1st September 2007) Arnold was not entitled to receive his pension. Instead, the increased annual rate of Arnold’s pension is compared with the pension Arnold was entitled to when he first became entitled to actually receive it - £10,000 pa on 1 December 2007. The threshold annual rate has been exceeded this time as the increase has exceeded 5% (£11,025 - £10,000 = an increase of £1,025 or 10.25%) and so the test against the permitted margin (see RPSM11104350) is required to determine whether or not there will be a BCE 3 in respect of this increase.
For the purpose of this example it is assumed that increases by reference to the relevant indexation percentage would have given lesser amounts of increase and that no rounding up has occurred.
| Glossary (RPSM20000000) |
