PensionsJun 11 2019

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.
  • 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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Revisiting the calculations for pre-2006 pension benefits

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.

Example

On April 5 2006, Gerry had lump sum rights of £50,000 and uncrystallised pension rights of £100,000. Gerry carried on working until 2012, so his employer made contributions to the scheme up until that point. He took benefits on May 10 2019. At this point, his pension rights were valued at £220,000.

Gerry’s lump sum (LS) is calculated like this:

£50,000 x (£1.8m / £1.5m) = £60,000

And his additional lump sum amount (ALSA) is calculated like this:

(£220,000 – (£100,000 x £1.055m / £1.5m)) x 25 per cent = £37,417

Gerry’s total PCLS is therefore:

£60,000 + £37,417 = £97,417

Quirks and exceptions

The above calculation is the standard calculation. If a member holds fixed protection or individual protection, however, the calculation is slightly different, and we use the protected LTA in the second part of the calculation instead of the current standard LTA.

Taking the example above, let’s assume Gerry held fixed protection 2016 and therefore had a protected LTA of £1.25m. The ALSA part of the calculation would look like this:

(£220,000 – (£100,000 x £1.25m / £1.5m)) x 25 per cent = £34,167

As you can see, this reduces the ALSA (and therefore the overall PCLS) by £3,250.

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