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Glossary PTM000001

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

Many registered pension schemes operate a provision under which a higher temporary pension (so an additional ‘bridging� pension) is paid for a few years after retirement (usually until the coming into payment of state pension). Typically, the temporary pension is payable to age 60 or 65.

The annual rate of pension (‘PE�) to be used to value defined benefit rights is the higher starting amount that will come into payment at retirement. This means that the �16 x� value factor applies to the temporary bridging pension as it would to a ‘whole-life� pension.

A similar situation can occur in relation to the lifetime allowance calculations but for that there may be a mitigation action: scheme rules often allow an individual to opt at retirement to exchange the temporary pension for a lower ‘whole-life� pension to which the �20 x� factor is then applied.

In the context of the annual allowance, this mitigation is not usually available. In general scheme rules only allow members to opt to exchange a temporary pension when they reach retirement, not on a ‘prospective� basis as would be needed for the annual allowance not to take it into account - so the �16 x� factor would apply to the temporary pension through all accrual years.

Example - regular accrual:

• member has normal pension age of 60
• part of the basic provision of the scheme at retirement is a bridging pension payable from normal pension age to age 65
• the normal pension age rule specifies that the member’s benefit on retirement at normal pension age is a whole-life pension of service at normal pension age x 1/60ths of final pensionable salary at normal pension age and a bridging pension of service x 1/80ths x the Basic State Pension at normal pension age
• at the close of the previous pension input period, the member had service of 30 years, final pensionable salary of £60,000 and the Basic State Pension is £5,000
• the member stays in service and is a member throughout the pension input period and at the end of the pension input period final pensionable salary is £62,000 and Basic State Pension is £5,100
• pension input amount
• opening value:
  • step 1 - find annual rate of pension entitlement just before start of the pension input period for annual allowance purposes
  • ‘PBâ€� = [30/60 x £60,000] + [30/80 x £5,000] = £30,000 + £1,875 = £31,875
  • step 2 - multiply result by 16 (no special treatment arises from part of the pension being paid for a limited term
  • £31,875 x 16 = £510,000
  • step 3 - add on any separate lump sum entitlement
  • none so running total is £510,000
  • step 4 - increase amount for CPI (for the purpose of this example assume relevant CPI increase is 3%)
  • £510,000 x 1.03 = £525,300
• closing value:
  • step 1 - find annual rate of pension entitlement at end of the pension input period for annual allowance purposes
  • ‘PEâ€� = [31/60 x £62,000] + [31/80 x £5,100] = 32,033.33 + 1,976.25 = £34,009.58
  • step 2 - multiply result by 16
  • £34,009.58 x 16 = £544,153.28
  • step 3 - add on any separate lump sum
  • none so running total is £544,153.28
• if there are no other adjustments to the closing value, the pension input amount is £18,853.28 (£544,153.28 - £525,300)
• the part of this arising from the increased entitlement to the temporary pension is £720 (that is, [31/80 x £5,100] - [(30/80 x £5,000) + CPI])
• this calculation could apply both before the member retires and also in the year in which the member takes his benefits (at normal pension age).