RPSM11104370 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension – BCE 3: Calculation A for pensions first paid after 5 April 2006

The permitted margin where entitlement to the scheme pension arose on or after 6 April 2006 – calculation A

Under calculation A, the starting scheme pension, as measured initially through BCE 2, is increased each year up to the point of increase by what is called the ‘relevant annual percentage rate’.

This will be 5% per annum, unless the scheme has agreed with HMRC the use of a relevant valuation factor (RVF) that is greater than 20 for valuing all scheme pensions derived from that scheme for lifetime allowance purposes through BCE 2. Where such a non-standard RVF has been agreed HMRC will at the same time agree the relevant annual percentage rate that should be applied here for BCE 3 purposes.

The relevant annual percentage is applied on a compound basis for the whole intervening period between the point entitlement to the scheme pension initially arose to the point the increase concerned is being applied. There will be many instances where the intervening period will not be measured in whole years. In such cases, the relevant annual percentage is applied on a pro-rata basis by measure of months, counting the months the two points occur in as completed months. This is in contrast to the ‘relevant percentage rate’ that forms part of the threshold annual rate calculation. In that situation a pro-rata basis is not required when considering a 5% increase (or such greater amount if a non-standard RVF has been agreed) or for a scheme pension that has been in payment for a period of less than 12 months at the time that the increase is awarded (see RPSM11104345 for more details).

A similar thing happens when calculating the relevant indexation percentage under calculation B. The example on RPSM11104390 explains how this works.