RPSM11104438 - 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 - Example

Raj is receiving a scheme pension and the rate of his pension is increased on 1^st June 2006 from £10,000 to £13,000 per annum through a one-off augmentation funded by his employer.

For purpose of this example it is assumed that

• the threshold annual rate is exceeded, and
• the permitted margin in respect of Raj’s pension is £11,800.

So, the excess over the permitted margin (XP) is £1,200 and the amount that crystallises through BCE 3 for lifetime allowance purposes is £24,000 (20 x £1,200).

On 1^st February 2008 the rate of Raj’s pension is increased once again, this time to £30,000 per annum.

Again, for the purpose of this example, it is assumed that the threshold annual rate is exceeded and the permitted margin at the point of the latest increase comes to £20,000.

The XP from the previous BCE 3 (£1,200) now needs to be increased to determine how much of the potential XP in respect of the latest increase will be reduced by undertaking calculation A and calculation B. The potential XP at this point is the difference between the rate to which the pension has been increased and the permitted margin, which is £10,000 (£30,000 - £20,000).

Calculation A involves calculating what the level of the previous XP (£1,200) would be after applying the ‘relevant annual percentage rate’ to that XP for the intervening period between the previous BCE 3 and the latest increase to Raj’s pension. Counting the month in which the previous BCE 3 occurred and month of the latest increase as full months there are 21 months between the two points. The relevant annual percentage rate of 5% per annum has to be applied on a pro-rata basis which gives the following result for calculation A.

So the increased previous XP under calculation A is £1,308 (£1,200 + £60 + £48).

Calculation B involves calculating what the level of the previous XP (£1,200) would be after applying the ‘relevant indexation percentage’ to that XP for the intervening period between the previous BCE 3 and the latest increase to Raj’s pension.

As the RPI index value is not available for the month in which the latest increase is awarded (February 2008), the scheme administrator chooses December 2007 as the ‘reference month’ (the earliest month that the scheme administrator could have chosen is March 2007) to determine any increase in the RPI since the previous BCE 3. However, as the reference month (December 2007) is 2 months before the month in which Raj becomes entitled to his pension at the further increased rate (February 2008), the ‘base month’ must be April 2006 as this is the month that is 2 months before the month Raj had the previous BCE 3 in respect of an increase to his pension (June 2006).

The RPI index values for the month of April 2006 and December 2007 are 190 and 200 (note - these figures are estimated and are used for illustrative purposes only). The percentage rise in the RPI over the period is calculated as follows

So the increased previous XP under calculation B is £1,264 (£1,200 + £64)

As the resulting figure from calculation A is higher than calculation B, the amount to which the previous XP can be increased is £1,308 - the figure found under calculation A.

The amount found under calculation A is deducted from the potential XP to determine whether or not there is any actual XP in respect of the latest increase given to Raj’s pension. For this latest increase there will be an XP as the potential XP less the increased XP from the previous BCE 3 leaves an amount of £8,692 (£10,000 - £1,308).

So, the excess over the permitted margin (XP) in respect of the further increase given to Raj’s scheme pension on 1 February 2008 is £8,692 and the amount that crystallises through BCE 3 for lifetime allowance purposes is £173,840 (20 x £8,692).