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Glossary PTM000001

Note 鈥� for tax year 2015-16 there are transitional rules for calculating pension input amounts. PTM058070 has more details.

Sarah has an arrangement in a defined benefit scheme where she accrues a 60th benefit for each year of service and has a normal pension age of 65.

At the start of the pension input period Sarah has 19 years鈥� service and her final pensionable salary is 拢80,000.

Sarah鈥檚 opening value is calculated as:

find amount of annual pension

19/60 x 拢80,000 = 拢25,333

multiply annual rate of pension by flat factor of 16

拢25,333 x 16 = 拢405,333

add amount of separate lump sum

there is no separate lump sum = 拢405,333

increase by CPI (for the purpose of this example, 3%)

拢405,333 x 1.03 = 拢417,492.99.

Sarah鈥檚 opening value is 拢417,492.99.

Before the end of the pension input period Sarah is due to leave service and would have an automatic right to a deferred pension. Instead, she asks to take immediate early retirement at age 64, with 20 years of service. The employer consents and the scheme applies its current reduction factor for early retirement of 0.96 to Sarah鈥檚 pension (that is, a 4% reduction for each year she has taken benefits prior to age 65).

Sarah鈥檚 final pensionable salary at retirement is 拢90,000 and so her pension entitlement before considering any options is actually 20/60 x 拢90,000 x 0.96 = 拢28,800.

The scheme allows members to opt at retirement to give up some pension entitlement instead for a lump sum (a pension commencement lump sum). Sarah elects to commute 拢4,000pa of her pension and, using the scheme鈥檚 commutation factor of 17:1, the scheme grants her a lump sum of 拢68,000 and a residual pension of 拢24,800.

Without the closing value adjustment, Sarah鈥檚 closing value for the pension input period would be nil because Sarah has become entitled to all of her benefits under her arrangement (that is, she has no uncrystallised benefits under her arrangement).

However, there is an adjustment to the closing value because there has been a BCE 2.

The adjustment is based on the actual rate of annual pension that was crystallised (that is, recognised in the BCE 2) but the pension reduction arising from the commutation for lump sum is added back as well.

The lump sum arising from the commutation of pension is a BCE 6 but this BCE does not trigger any adjustment to the closing value because it has arisen from commutation of pension.

(If a lump sum had been paid that did not arise from commutation of pension entitlement but, instead, was a pre-existing right, the amount of the lump sum would also have to be added to the closing value.)

Sarah鈥檚 closing value is calculated using the actual pension but unwinding any commutation.

Sarah鈥檚 closing value is calculated as:

find amount of annual pension (that is, actual pension plus commuted pension)

20/60 x 拢90,000 x 0.96 = 拢28,800

multiply annual rate of pension by flat factor of 16

拢28,800 x 16 = 拢460,800

add amount of separate lump sum

there is no separate lump sum = 拢460,800.

Sarah鈥檚 closing value is 拢460,800.

So, Sarah鈥檚 pension input amount for the pension input period for this arrangement is:

拢460,800 - 拢417,492.99 = 拢43,307.01.