RPSM11104395 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension - BCE 3: Example of calculation A and B: BCE 3 occurs on or after 6 April 2008

Example of how calculation A and B are worked out where entitlement to the scheme pension arose on or after 6 April 2006 and BCE 3 occurs on or after 6 April 2008

John became entitled to a scheme pension of £10,000 per annum on 1 June 2007. This entitlement is tested through BCE 2, with £200,000 crystallising for lifetime allowance purposes.

John’s pension is increased to £10,600 on 5 February 2009.

For the purpose of this example, it is assumed that the increase to John’s pension exceeds the threshold annual rate (see RPSM11104341 for more details).

The scheme administrator now needs to be satisfied that the pension has not been increased beyond the permitted margin.

The scheme administrator needs to calculate what the level of annual pension would be after applying the ‘relevant annual percentage rate’ to the starting pension for the intervening period. Counting the starting month and month of increase as full months there are 21 months between the two points. Applying the relevant annual percentage rate of 5% per annum on a pro-rata basis gives the following result for calculation A.

5% increase for the 12 months to 1 June 2008 takes the £10,000 starting annual rate to £10,500.

Increase £10,500 pro-rata by the 5% annual increase measure to cover the 9 months to February 2009. The percentage increase here is 3.75% (9/12 x 5%).

3.75% of £10,500 is £394.

So the permitted margin the pension can be increased to under calculation A is £10,894 (£10,000 + £500 + £394).

The scheme administrator then has to do the same thing but applying the ‘relevant indexation percentage’.

As the RPI index value is not available for the month in which the increase is awarded (February 2009), the scheme administrator chooses December 2008 as the ‘reference month’ (the earliest month that the scheme administrator could have chosen is March 2008) to determine any increase in the RPI since John became entitled to his pension. However, as the reference month (December 2008) is 2 months before the month in which John becomes entitled to his pension at the increased rate (February 2009), the ‘base month’ must be April 2007 as this is the month that is 2 months before the month John became entitled to his pension (June 2007).

The figures for these two months are 190 and 200 (note - these figures are used for illustrative purposes only). The percentage rise in the RPI over the period is calculated as follows

200/190 x 100 - 100 = 5.3%. This is the relevant indexation percentage.

5.3% of £10,000 = £530.

Applying the relevant indexation percentage to the starting rate of John’s pension (£10,000 per annum) the resulting figure for calculation B is £10,530 (£10,000 + £530). The permitted margin by which John’s pension can be increased to under calculation B is therefore £10,530.

As the resulting figure from calculation A is higher than calculation B, the permitted margin is £10,894 - the figure found under calculation A. So if John’s pension had been increased beyond £10,894 BCE 3 is triggered (with the excess over £10,894 being ‘XP’).

As John’s pension has been increased to a rate of £10,600pa, the increased rate is below the amount found under calculation A (£10,894) the increase is within the permitted margin for John’s pension at the time of the increase in February 2009 and no BCE 3 occurs in respect of that increase.