RPSM11104436 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension - BCE3: Prevention of overlap under BCE3 when calculating XP: Further BCE3 occurs on or after 10 October 2007: Increasing XP by the relevant annual percentage rate

Once an increase in a scheme pension in payment has triggered a lifetime allowance test through BCE 3 the level of excess pension (XP) that crystallised at that point will be excluded from the calculation of XP at any future event, where that same pension is potentially increased once again beyond the permitted margin at that time.

Where BCE 3 is triggered more than once, the notional XP at the latest point is reduced by the XP, or the total of the XP amounts, that crystallised at those earlier events.

Where the further BCE 3 occurs on or after 10^th October 2007, the XP at that further event is reduced by increasing the XP that crystallised at the earlier BCE 3 event, or by increasing each XP (if there was more than one earlier BCE 3 event) by the greater of ‘calculation A’ and ‘calculation B’.

Under calculation A, the XP from the earlier BCE 3 is increased each year up to the point of the future BCE 3 by what is called the ‘relevant annual percentage rate’.

This will be 5% per annum, unless the scheme has agreed with HMRC the use of a relevant valuation factor (RVF) that is greater than 20 for valuing all scheme pensions derived from that scheme for lifetime allowance purposes through BCE 2. Where such a non-standard RVF has been agreed HMRC will at the same time agree the relevant annual percentage rate that should be applied here for BCE 3 purposes.

The relevant annual percentage rate is applied on a compound basis for the whole intervening period between the point entitlement to the scheme pension initially arose to the point the increase concerned is being applied. There will be many instances where the intervening period will not be measured in whole years. In such cases, the relevant annual percentage is applied on a pro-rata basis by measure of months, counting the months the two points occur in as completed months. This is in contrast to the ‘relevant percentage rate’ that forms part of the threshold annual rate calculation. In that situation, a pro-rata basis is not required when considering a 5% increase (or such greater amount if a non-standard RVF has been agreed) to a scheme pension that has been in payment for a period of less than 12 months at the time that the increase is awarded (see RPSM11104345 for more details).

A similar thing happens when calculating the relevant indexation percentage under calculation B. The example on RPSM11104438 explains how this works.