RPSM11104420 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension – BCE 3: Calculating the crystallised value

Calculating the capital crystallised value of any pension increase beyond the permitted margin (XP)

Where the increase is already beyond the “threshold annual rate,” the legislation gives a formula for calculating the capital value of any scheme pension increase beyond the permitted margin as well. It provides a notional value of the capital worth of the increased pension beyond that permitted margin. This is done by multiplying the excess increase (XP) by a relevant valuation factor (RVF). This is represented by the formula

RVF x XP
RVF = the relevant valuation factor
XP = the annual amount the pension in payment has been increased beyond the permitted margin.

The RVF is set at 20, but the scheme administrator may agree a higher RVF with HMRC if the particular benefit provision provided by the scheme warrants it (see RPSM11104230).

A higher non-standard RVF will have a bearing on the level of the permitted margin (and hence the level of XP) - see comments on ‘calculation A’ in RPSM11104370.

Example

In March 2007 Fred’s scheme pension is increased from £10,000 to £13,000 per annum through a one-off augmentation funded by his employer.
This increase is beyond the threshold annual rate (see RPSM11104341).
The permitted margin Fred’s pension can be increased to is £11,800. This means that Fred’s scheme pension has been increased by £1,200 over the permitted margin. XP is therefore £1,200.
So the amount that crystallises through BCE 3 for lifetime allowance purposes at that point is £24,000 (20 - the RVF that applies x £1,200).

Credit is given if at a later date further sums crystallise through BCE 3 (due to future increases to that scheme pension) in recognition of the fact that an earlier increase to that pension has already triggered a lifetime allowance test, and used up part of that individual’s lifetime allowance. So, as with other BCEs, no overlap occurs. How the credit is calculated depends on whether the further sums crystallising through BCE 3 occurred before 10th October 2007 or on, or after, that date. See RPSM11104430 for more details.

Reduction of entitlement to cover lifetime allowance charge liability

If the member does not have sufficient available lifetime allowance to cover the amount crystallising through BCE 3 the scheme administrator may reduce the member’s pension entitlement in order to cover the lifetime allowance charge due on the chargeableamount arising at that BCE.

This potential reduction is ignored when calculating XP. So XP will be based on the full entitlement under the scheme before any reduction.

Where either the pension entitlement from the scheme is not reduced, or the reduction does not reasonably reflect the tax charge paid by the scheme administrator, based on normal actuarial practice, the tax charge paid by the scheme administrator is added on to the chargeable amount arising. It becomes what is called a scheme-funded tax payment. RPSM11105220 explains this in more detail