RPSM11104930 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Pension in payment on 6 April 2006: The capital value of the pre-commencement pension

Calculating the capital value of the pre-commencement pension

The crystallised value of a pre-commencement pension is calculated by multiplying the annual rate of the pension in payment (referred to in the legislation as ‘ARP’) at the point of calculation by a conversion factor.

The factor for valuing such pensions is 25:1 (rather than the 20:1 used with post 6 April 2006 scheme pensions). This applies no matter how that pre-commencement pension is being paid, i.e. as a scheme pension, from a pre-6 April 2006 annuity contract etc.

This higher rate reflects the fact that the member will, in almost all circumstances, have taken, or had the opportunity to take, a tax free lump sum when originally drawing the pension.

This 25:1 factor should be applied to the annual rate of pension payable to the member at the time of valuation/crystallisation. This is the annual rate in force on the same day that first BCE occurs after 5 April 2006 (not the annual rate in payment on 5 April 2006).

Example

On 5 April 2006 Brian is in receipt of an annual pension of £15,000 per annum.

On 1 November 2007 Brian becomes subject to a BCE. This is his first BCE post 5 April 2006. At that time, his pre-commencement pension in payment is £20,000 per annum.

Brian’s level of available lifetime allowance at that first BCE is reduced to reflect the level of pre-commencement pension in payment at that time. The rate to be used is the annual rate in payment on 1 November 2007, not 5 April 2006.

The amount Brian’s available lifetime allowance is reduced by is £500,000 (25 x £20,000). This represents 31.25% of the standard lifetime allowance (£1.6 million).

Brian only has 68.75% of the standard lifetime allowance available at that first BCE.

Where there is more than one pre-commencement pension in payment the annual rate of each would be aggregated into ‘ARP’ before applying the 25:1 conversion factor.

RPSM11104940 explains how you calculate the annual rate where the pre-commencement pension is being paid post 5 April 2006 from a scheme as either an unsecured pension or alternatively secured pension at the point of that first BCE.

RPSM11104950 and RPSM11104960 provide two examples.