RPSM13100305 - Technical Pages: International Enhancement: Non residence factor for defined benefit arrangements

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

Articles 12 - 14 of The Taxation of Pension Schemes (Transitional Provisions) Order 2006 provide 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 RPSM13100280 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:

• 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).
• 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 opening value at a in RPSM13100280 is calculated instead by substituting for the individual's pension entitlement and separate lump sum entitlement (if any) under the defined benefits arrangement at the latest of the three dates specified in the first bullet above:

Example

Sally, who is working in Spain and would have been a relevant overseas individual in 2005/06, has claimed primary protection. Her pension entitlement in her defined benefits arrangement as at 5 April 2006 was £40,000 pa. She was also entitled to a separate lump sum of £200,000.

She returned to work in the UK on 6 December 2011 (before a benefit crystallisation event and before she ceased to accrue benefits under the cash balance arrangement). She therefore ceased to be a relevant overseas individual on 5 April 2011. Her pension entitlement in the arrangement as at 5 April 2011 was £65,000 pa. She was also entitled to a separate lump sum of £260,000.

The value at a in RPSM13100280 is £1.2 million. That is worked out by:

The value at b in RPSM13100280 is £1.56 million. That is worked out by multiplying £65,000 by 20 and adding £260,000.

The difference between that opening value and the closing value of Sally's rights in the arrangement is £360,000 i.e. £1.56 million minus £1.2 million.

The defined benefits 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).