RPSM09102500 - Technical Pages: Member benefits: An unsecured pension: Review of the unsecured pension limit: Example of a review when there is additional fund designation

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.

An example of a review of the unsecured pension limit where additional fund designation occurs

On 1 January 2008 John takes part of his benefits under his money purchase arrangement. £140,000 is designated to provide an unsecured pension.

The scheme administrator calculates a basis amount of £10,000 per annum on 1 January 2008 giving a maximum unsecured pension of £12,000 (120% of £10,000). This limit applies for the first five pension years (the first reference period), running from 1 January 2008 to 31 December 2008, 1 January 2009 to 31 December 2009 and so on.

The fifth pension year ends on 31 December 2012. So the first formal review is therefore due on 1 January 2013 (with the calculation being carried out on a ‘nominated date’ between 2 November 2012 and 1 January 2013).

On 1 February 2010, John’s unsecured pension fund stands at £90,000. John decides to use the remaining uncrystallised funds (£110,000) to increase his unsecured pension.

John draws his maximum pension commencement lump sum (£27,500), with the remaining £82,500 uncrystallised funds being designated to provide unsecured pension. Payment of the lump sum and the designation of funds to provide unsecured pension are tested for lifetime allowance purposes (through BCE 1 and 6). The additional fund designation also triggers a review of unsecured pension limits.

Immediately after the additional fund designation the unsecured pension fund stands at £172,500 (the existing £90,000 and the £82,500 brought in through the additional fund designation). A revised basis amount is calculated by the scheme administrator as at 1 February 2010 using the GAD tables as appropriate, based on the increased unsecured pension fund and John’s age at that point. No 60 day window for calculation is permitted. The revised basis amount is calculated at £13,000 per annum, giving a new maximum of £15,600 per annum.

The new maximum applies to the two later remaining pension years in the five year reference period, running from 1 January 2011 to 31 December 2011 and 1 January 2012 to 31 December 2012. But it also replaces the existing maximum for the current pension year (1 January 2010 to 31 December 2010). As John has already drawn £12,000 in this pension year he can now draw up to another £3,600 between 1 February and 31 December 2010.

On 1 January 2013 a formal review takes place as normal. The maximum calculated there then applies for the next five pension years (the next reference period), which remain unaltered. The scheme administrator may make this calculation in a 60 day window ending on the 1 January 2013.