Pensions 

Revisiting the calculations for pre-2006 pension benefits

  • List the conditions that must be satisfied for a protected lump sum to be paid.
  • Describe how the protected lump sum itself is calculated.
  • Identify the exceptions to the normal calculations.
CPD
Approx.30min

If a transfer does not meet the block transfer requirements, it will still be a recognised transfer (and therefore an authorised payment), but the protection will be lost on the funds that are transferred.

If only part of the funds are transferred, the funds not transferred will still retain the protection.

How does the calculation work?

Before we get on to the calculation and an example, let’s look at the constituent parts.

There are two key figures, and they both relate to the member’s lump sum entitlement at A-Day. These are:

  1. VULSR = value of uncrystallised lump sum rights as at April 5 2006.
  2. VUR = value of uncrystallised rights as at April 5 2006.

As the names suggest, these represent the value of the tax-free lump sum rights and the value of the uncrystallised funds to which that lump sum related.

These figures were calculated and recorded shortly after A-Day by the scheme administrator. There was no need to notify HMRC of the figures.

Accordingly, there is no certificate for this like there was for enhanced protection and primary protection.

If the lump sum is preserved on transfer as part of a block transfer, the transferring scheme will provide these figures to the new scheme.

The calculation also uses three lifetime allowance (LTA) figures:

  • ULA = underpinned lifetime allowance, which is always £1.8m.
  • FSLA = former standard lifetime allowance, which is always £1.5m (the standard in 2006-07).
  • CSLA = current standard lifetime allowance, i.e. whatever the LTA is when the member takes benefits.

Here is the calculation itself. Before we go through an example, let’s unpack this a bit to try and understand what it is doing.

PCLS =   Lump Sum (LS) + Additional Lump Sum Amount (ALSA)

LS =        [  VULSR x (ULA / FSLA)  ]

ALSA =  [  (LS + AC) – (VUR x (CLSA / FSLA))  ] x 25 per cent

The calculation is split into two parts.

The first part (LS) takes the lump sum at A-Day and revalues it in line with changes to the standard LTA since that date. This serves as a kind of indexation of the lump sum.

The government reduced the standard LTA on April 6 2012 from £1.8m to £1.5m, but allowed the calculation to carry on using £1.8m. £1.8m divided by £1.5m equals 1.2.

Therefore, the A-Day lump sum rights are effectively uplifted by 20 per cent.

The second part (ALSA) calculates the PCLS on any growth and contributions since A-Day.

When working through the ALSA part, the ‘(LS + AC)’ element is best understood as just meaning the whole of the funds from which the member is now taking benefits. From this figure, you deduct the value of the VUR, which is also revalued using LTA.

Strangely, the revaluation in the second part of the calculation uses the current standard LTA (CSLA) rather than the underpinned LTA of £1.8m.

The effect for the member is positive, however, as it reduces the value of the VUR, meaning less is deducted, and more is available for PCLS.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Which of the following forms of protection will, if held by the member, alter the lump sum calculation?

  2. How were protected lump sum rights from before A-Day calculated and documented?

  3. What is the value of the ‘underpinned lifetime allowance’?

  4. What is the outcome when a member transfers two protected lump sum entitlements into the same pension scheme?

  5. Which of these is not a block transfer requirement?

  6. Some schemes technically have only one member. The most common of these is a deferred annuity contract (sometimes known as a Section 32 policy). True or false?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • List the conditions that must be satisfied for a protected lump sum to be paid.
  • Describe how the protected lump sum itself is calculated.
  • Identify the exceptions to the normal calculations.

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