RPSM13100255 - Technical Pages: International Enhancement: Non Residence Factor Cash balance arrangement: Primary protection

How to calculate the non-residence factor for a cash balance arrangement if primary protection has also been claimed

Paragraphs 12 and 13 of The Pension Schemes (Part 4 of the Finance Act 2004 Transitional [and Transitory] Provisions) Order 2006 provides for a variation in the calculation of the cash balance arrangement non-residence factor where the individual is also claiming primary protection. The calculation of the opening value at a in RPSM13100240 is modified if the individual would have been a relevant overseas individual in the 2005/06 tax year had section 221(3) been in force then, and if the conditions in either a or b below are met:

1. The individual has notified HMRC of their entitlement to a non-residence factor where the active membership period in relation to the cash balance arrangement began on 6 April 2006, and notifies - or has already notified - HMRC of their intention to rely on primary protection (see RPSM03102010).
2. The individual has notified HMRC of their intention to rely on primary protection, and notifies - or has already notified - HMRC of their entitlement to a non-residence factor where the active membership period in relation to the cash balance arrangement began on 6 April 2006.

The value at a in RPSM13100240 is calculated instead by:

The individual's rights under the cash balance arrangement in the first dashed bullet above are represented by the amount which would be available to provide benefits to or in respect of the individual if they became entitled to the immediate payment of them on 5 April 2006. The value of the individual's rights is established using the valuation assumptions set out in section 277.

Example

Jeff, who is working in Italy and would have been a relevant overseas individual in 2005/06, has claimed primary protection. The value of his pension rights in his cash balance arrangement as at 5 April 2006 amounted to £1 million.

He returned to work in the UK on 14 November 2011 (before a benefit crystallisation event and before he ceased to accrue benefits under the cash balance arrangement). He therefore ceased to be a relevant overseas individual on 5 April 2011. The value of his pension rights in his cash balance arrangement as at 5 April 2011 amounted to £1.56 million.

The opening value used in calculating his non-residence factor is £1.2 million. That is arrived at by multiplying £1 million by 1.2, which is the product of dividing £1.8 million (the standard lifetime allowance for the 2010-2011 tax year) by £1.5 million. The difference between that opening value and the closing value of Jeff's rights in the arrangement is £360,000 i.e. £1.56 million minus £1.2 million.

The cash balance arrangement non-residence factor is therefore 0.2. That is calculated by dividing £360,000 by £1.8 million (the standard lifetime allowance for the 2010-2011 tax year).