PTM053710 - Annual allowance: pension input amounts: adjustments to closing values: further detail
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Defined benefits and cash balance arrangements: examples of adjustments to closing values
Transfers
Example of adjustment of closing value for a transfer
Example of adjustment of closing value for a pension credit
Example of adjustment of closing value for a benefit crystallisation event (BCE)
Defined benefits and cash balance arrangements: examples of adjustments to closing values
Sections 232 and 236 Finance Act 2004
The guidance on this page applies to defined benefits and cash balance arrangements and hybrid arrangements that might provide defined benefits or cash balance benefits.
PTM053300 (for defined benefits arrangements) and PTM053400 (for cash balance arrangements) have more details about the adjustments that must be made to closing values.
The guidance on this page does not apply in the case of a 鈥榖lock transfer鈥� from one registered pension scheme to another.
See PTM053720 for details about 鈥榖lock transfers鈥�.
Transfers
If there is a transfer of sums or assets (a 鈥榯ransfer payment鈥�) from one registered pension scheme to another involving a defined benefits arrangement or cash balance arrangement, an adjustment is made to take account of the transfer payment.
In the case of a transfer-out from a defined benefits or cash balance arrangement, there is an adjustment to determine whether there is an increase in pension savings in the transferring arrangement.
In the case of a transfer-in to a defined benefits or cash balance arrangement, there is an adjustment to determine whether there is an increase in pension savings in the receiving arrangement.
Transfer out
The pension savings amount, or pension input amount, for the transferring scheme is valued by adding back to the closing value
- in the case of a cash balance arrangement, the amount of the reduction in rights available to provide benefits under the arrangement relating to the transfer payment,
- in the case of a defined benefits arrangement, the amount of pension (and separate lump sum if applicable) that relates to the transfer payment.
Transfer in
The pension savings amount, or pension input amount, for the receiving scheme is valued by subtracting from the closing value:
- in the case of a cash balance arrangement, the amount of the increase in rights available to provide benefits under the arrangement relating to the transfer payment
- in the case of a defined benefits arrangement, the amount of pension (and separate lump sum if applicable) that relates to the transfer payment.
General requirements for transfer payments out and in
There must be a direct link between the amount of the transfer payment and the amount added back or subtracted from the closing value for the purpose of the pension input amount calculation. The amount added back or subtracted is so much of the decrease or increase in:
- for a defined benefits arrangement, the pension (and, if applicable, separate lump sum)
- for a cash balance arrangement, the rights available to provide benefits
that is solely attributable to the amount of the sums and assets transferred. This would usually be determined by normal actuarial practice allowing for the specific circumstances.
If the increase in pension savings in the receiving scheme relating to the transfer payment is augmented so that the increase is over and above the amount of increase that the transfer payment was capable of funding, the 鈥榚xcess鈥� amount of the increase is included in the pension input amount calculation.
In the case of a transfer out the individual will normally be given a 鈥榗ash equivalent transfer value鈥� (CETV) of the benefit rights that had built up by the time of the transfer. Where the individual is given a reduced CETV, such as due to underfunding in the transferring pension scheme, it is likely that a lesser amount will be added back to the closing value compared to the amount that would have been added back had a full CETV been given.
Transfers within the same pension scheme
The principles above also apply when there is a transfer between arrangements within the same registered pension scheme (except for 鈥榖lock transfers鈥� within the same scheme - see PTM053720).
Pension debits and pension credits
There are similar rules to take account of pension sharing orders on divorce, where the value transferred is referred to as a pension credit from the same or another registered pension scheme.
Example of adjustment of closing value for a transfer
Tundi is a member of a final salary scheme (a defined benefits arrangement).
His benefits build up at a rate of a pension of 1/80th (and a separate lump sum of 3/80ths) of final pay for each year of scheme membership.
Immediately before the start of his pension input period, Tundi has 19 years scheme membership and his 鈥榝inal pay鈥� is 拢65,000. For the purpose of this example, the annual increase in CPI to the September before the tax year is 3.2 per cent.
During the pension input period in question Tundi changes jobs. He joins his new employer鈥檚 career average scheme (which is also a defined benefits arrangement). Tundi earns a pension of 2 per cent of his annual pay rate for the year from this scheme. The scheme does not give a separate lump sum. If Tundi wants to take a lump sum when he retires he must give up (commute) pension to get the lump sum.
Tundi transfers his benefits from his old final salary scheme (scheme 1) into the new career average scheme (scheme 2).
Calculating the opening values
Tundi鈥檚 opening value for scheme 1 (the final salary scheme) is calculated as:
Find amount of annual pension
19/80 x 拢65,000 = 拢15,437.50
Multiply annual rate of pension by flat factor of 16
拢15,437.50 x 16 = 拢247,000
Add amount of separate lump sum
拢247,000 + (19 x 3/80 x 拢65,000) = 拢293,312.50
Increase by CPI
拢293,312.50 x 1.032 = 拢302,698.50
So the opening value for scheme 1 is 拢302,698.50.
The opening value for scheme 2 is nil (as Tundi is a new member at the start of the pension input period for the arrangement under scheme 2).
Calculating the closing values
The closing values for both scheme 1 and scheme 2 need to be adjusted because of the transfer value. If this was not done the pension input amounts for both schemes would not be correct. This adjustment is only needed for the pension input period that the transfer takes place in.
Without an adjustment the closing value for scheme 1 would be nil (as all the benefits have been given up in exchange for a transfer out). The amount of Tundi鈥檚 benefit rights in scheme 1 that he exchanged for the transfer payment is added back to the closing value for scheme 1. At the point Tundi arranged the transfer he had built up a pension of 拢16,800 and a separate lump sum of 拢50,400 in scheme 1.
This means that the closing value for scheme 1 is:
Find amount of annual pension
拢16,800
Multiply annual rate of pension by flat factor of 16
拢16,800 x 16 = 拢268,800
Add amount of separate lump sum
拢268,800 + 拢50,400 = 拢319,200
The closing value for scheme 1 is 拢319,200.
In scheme 2 the transfer payment from scheme 1 was able to fund (or 鈥榩urchase鈥�) a pension equivalent of 拢18,300. In the pension input period for scheme 2 Tundi has earned a pension of 拢800 from his new job. This makes his total annual pension under the scheme 拢19,100. Without an adjustment to take account of the transfer in, the closing value for scheme 2 would be 拢305,600 (拢19,100 x 16).
To find the closing value for scheme 2 the effect of the transfer is neutralised because the pension equivalent of 拢18,300 was no more than the amount that the transfer payment was capable of purchasing in scheme 2. The closing value for the pension input period is based only on the rights built up under scheme 2 - that is a pension of 拢800.
So the closing value for scheme 2 is:
Find amount of annual pension
拢800
Multiply annual rate of pension by flat factor of 16
拢800 x 16 = 拢12,800
Add amount of separate lump sum
拢12,800 + 拢0 (there is no separate lump sum) = 拢12,800
The closing value for scheme 2 is 拢12,800.
Finding the pension input amounts
Tundi鈥檚 pension inputs from his defined benefits arrangements are:
For scheme 1: closing value (拢319,200) - opening value (拢302,698.50) = 拢16,501.50
For scheme 2: closing value (拢12,800) - opening value (nil) = 拢12,800
As Tundi is not a member of any other arrangement his total pension input amount for the tax year is 拢29,301.50 (拢16,501.50 + 拢12,800).
For future tax years, the pension input amount is calculated as normal, with no adjustment for the transfer.
Example of adjustment of closing value for a pension credit
Angela is a member of a cash balance arrangement. Angela gets 15 per cent of her annual pay rate added to her promised pension pot every year. Immediately before the start of the pension input period Angela鈥檚 pension pot has a value of 拢180,000. For the purpose of this example, the annual increase in CPI to the September before the tax year is 2.5 per cent.
Calculating the opening value
The opening value for the cash balance arrangement is:
拢180,000 x 1.025 = 拢184,500
During her pension input period Angela gets a pension credit from a pension sharing order. This pension credit has a value of 拢62,500.
Calculating the closing value
At the end of the pension input period the value of Angela鈥檚 pension pot is 拢247,750. However this amount includes the pension credit from another registered pension scheme. If no adjustment is made to the closing value Angela鈥檚 pension input would not reflect the amount she has actually built up over the pension input amount. This adjustment is only needed for the pension input period that Angela gets the pension credit.
The amount of the pension credit is taken off the closing value (so 拢247,750 - 拢62,500). This means Angela鈥檚 closing value is 拢185,250.
Finding the pension input amounts
Angela鈥檚 pension input under the cash balance arrangement is:
Closing value (拢185,250) - opening value (拢184,500) = 拢750.
For future years, the pension input amount is calculated as normal, with no adjustment for the pension credit.
Example of adjustment of closing value for a benefit crystallisation event (BCE)
Julia belongs to a pension scheme that gives her a pension of 1/60th pensionable pay for each year of scheme membership. The scheme does not give her a separate lump sum. If Julia wants to take a lump sum when she starts to draw benefits she will have to give up (commute) part of her pension.
Immediately before the start of the pension input period Julia has built up an annual pension of 拢26,500.
During the pension input period Julia reaches the scheme鈥檚 pension age and decides to start taking some of her benefits. She also wants to keep working and keep building up benefits. Julia鈥檚 pension scheme allows her to do this. Julia takes a pension of 拢12,000 and a lump sum of 拢80,000. To get her lump sum Julia had to give up 拢6,000 pension. So if Julia had not taken a lump sum she would be getting a pension of 拢18,000.
At the end of the pension input period Julia has 拢10,000 pension still to take.
For the purpose of this example, the annual increase in CPI to the September before the tax year is 3 per cent.
Calculating the opening value
Julia鈥檚 opening value for the scheme is calculated as:
Find amount of annual pension
拢26,500
Multiply annual rate of pension by flat factor of 16
拢26,500 x 16 = 拢424,000
Add amount of separate lump sum
There is no separate lump sum = 拢424,000
Increase by CPI
拢424,000 x 1.03 = 拢436,720
Julia鈥檚 opening value is 拢436,720.
Calculating the closing value
Without any adjustment for the BCE Julia鈥檚 closing value would be 拢160,000 (拢10,000 x 16). This does not reflect the fact that Julia has built up extra pension benefits over the pension input period. An amount equivalent to the BCE needs to be added back into the closing value. The adjustment to the closing value is made at step 1 by adding back the amount of pension taken. This is the gross amount of pension; the amount that would have been paid to Julia if she had not taken a lump sum. This is 拢18,000.
Find amount of annual pension
Remaining pension + Pension taken
拢10,000 + 拢18,000 = 拢28,000
Multiply annual rate of pension by flat factor of 16
拢28,000 x 16 = 拢448,000
Add amount of separate lump sum
There is no separate lump sum = 拢448,000
Julia鈥檚 closing value is 拢448,000.
Finding the pension input amount
Julia鈥檚 pension input amount is the difference between her closing value and her opening value. This is:
拢448,000 - 拢436,720 = 拢11,280
For future years, the pension input amount is calculated as normal, with no adjustment for the BCE.