RPSM09102490 - Technical Pages: Member benefits: An unsecured pension: Review of the unsecured pension limit: Where additional fund designation occurs before 6 April 2011 and transition to pension drawdown

This guidance only covers members who became entitled to an unsecured pension before 6 April 2011. If the member became entitled to their pension on or after 6 April 2011 then see the guidance at RPSM09103500.

Review of the unsecured pension limit: Where additional fund designation occurs

[Para 10(2), (4), (5), (6), (8) and (9), Sch 28] 

Where uncrystallised funds held in an arrangement are designated to provide unsecured pension, and there is already an unsecured pension fund held under that arrangement, that additional fund designation is absorbed into the existing unsecured pension fund. This triggers a review of the existing unsecured pension limit for that fund.

The calculation of the new basis amount must take place immediately after the additional fund designation occurs, i.e. on the same day, once the unsecured pension fund has been increased. The 60 day calculation window cannot be used. The review does not alter the existing pension year/reference period structure, or the timing of the next formal five-yearly review at the beginning of the next five-year reference period.

The revised limit on the unsecured pension takes effect immediately. As well as replacing the previous maximum for the remaining pension years in that reference period the revised limit also replaces the existing maximum for the current pension year in which the additional fund designation took place.

Also, unlike the position where dealing with an annuity purchase, a review will still need to be undertaken where additional fund designation occurs in the last pension year in a five-year reference period.

An example of the review following additional fund designation is shown at RPSM09102500.

It is possible that the pension limit does not increase following the designation of additional funds. For example, where the additional fund designation occurs towards the end of a five-year reference period, the value of the sums and assets in the unsecured pension fund may have decreased to such an extent that even with the additional funds, the overall value of the fund has decreased. This is therefore an advice issue that should be considered before an individual makes an additional fund designation.

For the avoidance of doubt, the transfer of unsecured pension fund to another registered pension scheme will never represent an additional fund designation. Such a transfer must in fact go to a fresh arrangement (where no existing uncrystallised funds or unsecured pension funds are already held) - see RPSM09102150. Similarly transfers cannot be made from one arrangement to another arrangement in the same registered pension scheme.

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Changes from 6 April 2011

The member is receiving an unsecured pension. If, after 5 April 2011, the member retains the 120 per cent limit and designates additional funds to boost their drawdown pension will this affect their current reference period?

No, the current reference period will continue to its natural end. But the member will trigger a new review of the basis amount. They can then take 120 per cent of the revised basis amount. This new level applies for the pension year in which the member designated the additional funds as well as for the remaining pension years of the current reference period.

The member is receiving an unsecured pension. If, after 5 April 2011, they retain the 120 per cent limit and designate additional funds to boost their drawdown pension but the review means the revised basis amount is in fact lower than it is now, what happens?

When the member designates additional funds into their drawdown pension fund, they will trigger a new review of the basis amount. The member can then take 120 per cent of the revised basis amount. This new level applies to the pension year in which the member designated the additional funds and for the remaining pension years of their current reference period.

But if the revised basis amount is less than the original basis amount meaning the amount of pension income the member can take is also reduced, this reduced amount only applies for the remaining pension years and not for the current pension year.