PTM053610 - Annual allowance: pension input amounts: valuation assumptions: general

Defined benefits and cash balance arrangements: valuation assumptions for working out the opening and closing value

Sections 230, 234 and 277 Finance Act 2004

For the purposes of working out the pension input amount, members’ rights under defined benefits arrangements and cash balance arrangements are calculated using the valuation assumptions.

The valuation assumptions means that the member’s rights under defined benefits and cash balance arrangement are valued on the basis of what would be available to the member if the member retired immediately before the start and at the end of the pension input period on the assumption that the member had already reached the age at which, under the scheme’s rules, no reduction applies because of age and with no addition for ill health. (This age will often be the same as the normal retirement date (NRD) under the scheme rules but not always. It is sometimes called the ‘normal pension age’ when discussing preservation requirements.)

In the case of a defined benefits arrangement, for example, the pension input amount is the increase in the value of the member’s rights in the arrangement over the pension input period. The member’s rights are worked out based on how much pension the member would receive immediately before the start and at the end of the pension input period if the member retired now and taking the benefits that would be due under the scheme rules immediately before the start and at the end of the pension input period, but having reached the age at which under scheme rules, no reduction for age is applied to those benefits.

The pension input amount is worked out by reference to the member’s actual circumstances immediately before the start and at the end of the pension input period. In the case of members who are active members immediately before the start and at the end of the pension input period, the pension input amount is worked out on the basis that they remain an active member (unless and until they have actually ceased to be an active member).

The calculation cannot take account of contingent future events. It does not, therefore, take account of what the position would be if, for example, the member became a deferred member after the pension input period start or end date. In determining the pension input amount, the wording of the scheme rules needs to be considered in order to establish the member’s entitlement at the start and end of the pension input period.

PTM053640 has some examples to show what this means in practice. In each case the precise nature of the scheme rules as a whole needs to be considered. For example if elements of pre-6 April 2006 ‘Inland Revenue maximum limits’ have been maintained these also need to be considered if they would impact the benefit that would be drawn had the member reached the age at which no reduction for age is applied to the benefits - this could materially change the calculation. See PTM054400 for more details about how pre-6 April 2006 Inland Revenue maximum limits might have application in relation to a pension input amount.