RPSM11104390 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension – BCE 3: Example of calculation A and B

Example of how calculation A and B are worked out where entitlement to the scheme pension arose on or after 6 April 2006

John became entitled to a scheme pension of £10,000 per annum on 1 June 2006. This entitlement is tested through BCE 2, with £200,000 crystallising for lifetime allowance purposes.

John’s pension is increased to £10,500 on 5 February 2008. The scheme administrator needs to be satisfied that the pension has not been increased beyond the permitted margin.

The scheme administrator needs to calculate what the level of annual pension would be after applying the relevant annual percentage to the starting pension for the intervening period. Counting the starting month and month of increase as full months there are 21 months between the two points. Applying the relevant annual percentage of 5% on a pro-rata basis gives the following result for calculation A.

5% increase for the 12 months to 1 June 2007 takes the £10,000 starting annual rate to £10,500.

Increase £10,500 pro-rata by the 5% annual increase measure to cover the 9 months to February 2008. The percentage increase here is 3.75% (9/12 x 5%).

3.75% of £10,500 is £394.

So the permitted margin the pension can be increased to under calculation A is £10,894 (£10,500 + £394).

The scheme administrator then has to do the same thing but applying the relevant indexation percentage. The scheme administrator compares the RPI index values for the month of June 2006 and February 2008. The figures for these two months are 190 and 200 (note - these figures are estimated). The percentage rise in the RPI over the period is calculated as follows

200/190 x 100 – 100 = 5.3%. This is the relevant indexation percentage.

5.3% of £10,000 = £530.

Applying the relevant indexation percentage to the £10,000 the resulting figure for calculation B is £10,530 (£10,000 + £530). The permitted margin the pension can be increased to under calculation B is therefore £10,530.

As the resulting figure from calculation A is higher than calculation B the permitted margin is £10,894. So if the pension is increased beyond £10,875 BCE 3 is triggered (with the excess being XP).

The increased level of £10,500 is below this figure, and no BCE occurs.