RPSM15106040 - Technical Pages: Special annual allowance: Becoming entitled to benefits or member dies: Example 1

This guidance only applies for the 2009-10 and 2010-11 tax years.

Test against special annual allowance where benefits taken: Example 1

James has relevant income of £150,000 or more.

He accrues benefits under a defined benefits (DB) scheme at a rate 1/60th of pensionable salary for each year of service.

James retired on 31st December 2009 and his pensionable salary for the DB scheme purposes rose from £120,000 at 6th April 2009 (when he had 15 years of pensionable service) to £140,000 at 31st December 2009 (when he had 15.75 years of pensionable service).

His accrued pension at 6th April 2009 was £30,000 pa and at 31st December 2009 it was £36,750 pa.

However James retired early so this pension was subject to an early reduction factor of 80% which meant his starting pension was £29,400 (£36,750 x 80%). James commuted some of his starting pension for his ‘25% lump sum’ at a rate of £15 lump sum: £1 of pension. Therefore, his actual package was a pension commencement lump sum of £135,692 and a residual pension of £20,354 pa. The scheme administrator identified the total BCE value of this as £542,769 (£135,692 + [£20,354 x 20]).

Although James has become entitled to all of his benefits under the DB scheme, a pension input amount has to be calculated as neither ‘Condition A’ nor ‘Condition B’ applies (see RPSM15106010).

Following the principles for the annual allowance, the pension input amount is calculated as follows

Note, for the purpose of the closing value, the actual package of benefits that James received and that were then fed into the BCE calculation is converted back into the prospective entitlement of £36,750 pa that James had under the DB scheme before deciding to retire early.

This example explains the principle for calculating the pension input amount where an individual becomes entitled to all benefits under an arrangement but the pension input amount still has to be taken into account for the purpose of the special annual allowance. Whether the pension input amount will be a protected pension input amount or be included as part of the total adjusted pension input amount will depend on the circumstances of the individual.