RPSM11104310 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension - BCE 3: Level of pension increases caught by BCE 3

If a scheme pension in payment is increased at any point beyond a certain level a lifetime allowance test is triggered through BCE 3. The level of increase at which an amount is regarded as crystallising for lifetime allowance purposes is defined in the legislation as the increase which exceeds both the

• threshold annual rate, and
• permitted margin.

The threshold annual rate is, in effect, an increase to the scheme pension, compared to the rate of the pension a year ago, not exceeding the greatest of 5% RPI or £250 (all rounded up to a complete number of pounds payable either weekly or monthly). However, there are circumstances when the 5% figure will be set at a different level for particular schemes (see RPSM11104342).

So the rate of pension following a current pension increase can then be compared to the threshold annual rate to see if the threshold annual rate has been exceeded. Where there has been a previous increase to the pension within the last 12 months, it is the rate of pension after the current increase (which will include the previous increase, which will itself have earlier been tested) that is compared to the threshold annual rate.

If the pension increase is occurring in the first year of payment of the pension, the threshold annual rate is the greatest of the 3 forms of increase as above applied to the rate of pension at the start of the pension. (see RPSM11104345).

The permitted margin is in effect a notional ongoing cost of living increase since the scheme pension came into payment, and is measured as an annual rate of increase of the greater of 5% or RPI (although there are circumstances when the 5% figure will be set at a different level for particular schemes - see RPSM11104370).

The intention is to only catch real value increases in pension benefits where these are funded directly by the scheme. Schemes that simply provide for annual increases linked to RPI or a set percentage of no more than 5% (or whatever percentage has been agreed between the scheme administrator and HMRC for that particular scheme) will not be concerned with this BCE.

An increase that does not exceed the threshold annual rate means that no test will be necessary to determine if the increase has gone beyond the permitted margin.

Where the threshold annual rate is exceeded, any excess (‘XP’) of a pension increase beyond the permitted margin is converted to a capital value in a similar way to the crystallisation of a scheme pension at outset through BCE 2 with the resulting figure representing the amount that crystallises at the point of increase.

RPSM11104341 to RPSM11104346 explain the threshold annual rate

RPSM11104350 to RPSM11104400 explain what the permitted margin is and how the amount crystallising through BCE 3 is calculated.

The effective date of this event is the date on which the member becomes entitled to the payment of the increased pension. RPSM11102050 discusses what is meant by entitlement in more detail.

There are circumstances where a scheme pension in payment may be increased beyond the permitted margin without giving rise to BCE 3. These are referred to in the legislation as the excepted circumstances. These are discussed on RPSM11104320.

An increase to a scheme pension after age 75

Increases made after the member’s 75th birthday are still caught through BCE 3. It is the only form of BCE that can apply after the member’s 75th birthday.

Pensions that came into payment before 6 April 2006

Pensions that came into payment before 6 April 2006 are equally caught by BCE 3 if they come within the scheme pension definition on or after 6 April 2006. This is covered further in RPSM11104970.