RPSM11104980 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Pension in payment on 6 April 2006: Example of an increase to a scheme pension in payment

Example of augmenting a pre-commencement scheme pension

On 5 April 2006 Colin is in receipt of an annual pension of £34,000. He has no other pension benefit in payment. From 6 April 2006 onwards this pension meets the definition of a scheme pension.

Colin’s pension in payment increases each year by 5%. Such increases do not trigger a benefit crystallisation event through BCE 3 as they are within the permitted margin.

On 8 April 2010 Colin’s annual pension has again been increased by 5%, taking his pension to £41,330 per annum. However, at that point the employer/scheme administrator also agrees to augment Colin’s pension by another 10% after the 5% per annum increase.

As this increase is given to Colin alone and goes beyond the permitted margin an amount crystallises through BCE 3. The crystallised amount at this event is

So the amount crystallising through BCE 3 is £82,660, which represents 4.6% of the standard lifetime allowance of £1.8 million for the 2010/11 tax year.

This is Colin’s first BCE after 5 April 2006. As his scheme pension is a pre-commencement pension the crystallised value of this pension needs to be considered when calculating his available lifetime allowance at that BCE.

The annual pension in payment before the augmentation was £41,330. So the crystallised value of this pension is calculated as being £1,033,250 (25 x £41,330). This represents 57.4% of the standard lifetime allowance of £1.8 million for the 2010/11 tax year.

Colin’s available lifetime allowance at that first BCE (BCE 3) is not 100% of the standard lifetime allowance, but 42.6% (100% - 57.4%). So following the BCE 3 Colin has effectively used up 62% of the standard lifetime allowance, leaving 38% available for the next BCE (if one is triggered).