PTM053930 - Annual allowance: pension input amounts: deferred members: further details
Glossary PTM000001
GMP revaluation
What is meant by rules in force on a certain date
Discretionary increases
Late retirement increases by actuarial uplift factors
Late retirement increases where member continues in service
Career average re-valued earnings schemes
Sections 230(5C) and 234(5C) Finance Act 2004
GMP revaluation
A right to GMP that is included as part of the member’s deferred benefit rights under the arrangement, or a GMP that constitutes all of the member’s rights under the arrangement, is not taken into account. Effectively, if the deferred member carve-out applies to the other benefits under the arrangement, the rate of increase that must be given to the GMP can be ignored.
PTM053910 has more details about the deferred member carve-out.
What is meant by rules in force on a certain date
One of the conditions for the deferred member carve-out to apply in relation to an arrangement is that the member’s ‘relevant rights’ do not increase during the pension input period by more than the sum of the ‘relevant percentage’ and the ‘relevant statutory increase percentage’.
For this purpose, the ‘relevant percentage’ means:
- an annual percentage rate in force in the scheme rules on the ‘relevant date’ by which deferred benefits under the arrangement will be increased, and
otherwise
- a CPI increase (see PTM053920).
For the annual rate of increase in respect of an arrangement to be in accordance with a rule that was in force in the scheme rules on the ‘relevant date’ it might be the case that the arrangement was also in existence under the scheme on that date, but it can also include a new arrangement set up under that scheme (or another scheme) after that date.
A new arrangement can include the following circumstances.
The first circumstance is where:
- the new arrangement is created due to a new member starting pensionable service
- the pensionable service ceases at a future date without immediate payment of benefits
- the annual percentage rate by which the deferred benefits under the arrangement are increased is determined by a scheme rule that was in force on the ‘relevant date’.
The second circumstance is where:
- some or all of the sums or assets held for the purposes of the new arrangement derive from an existing arrangement under the same registered pension scheme (the ‘predecessor arrangement’)
- the annual percentage rate by which the deferred benefits under the new arrangement are increased is determined by a scheme rule that had applied to the predecessor arrangement and that scheme rule was in force on the ‘relevant date’.
The third circumstance is where:
- some or all of the sums or assets held for the purposes of the new arrangement derive from an existing arrangement (the ‘predecessor arrangement’) under a different registered pension scheme (the ‘predecessor scheme’)
- the annual percentage rate by which the deferred benefits under the new arrangement are increased is determined by a scheme rule which is the same as a scheme rule under the predecessor scheme which had applied to the predecessor arrangement and the predecessor scheme rule was in force on the ‘relevant date’.
The second and third circumstances described above allow for an individual to change pension schemes (or change arrangements within the same scheme) either individually or, for example, on a scheme merger, company reorganisation or a business or company sale, and for the uprating terms for deferred members that were included in the transferring scheme on the ‘relevant date’ to be ‘grandfathered’ within the receiving scheme (or the same scheme if the transferring arrangements are within the scheme). This is to ensure that the individual is in no worse position on being transferred to the receiving scheme, or new arrangement in the same scheme.
Discretionary increases
The annual percentage rate in force in the scheme rules on the ‘relevant date’ must apply under the scheme provisions automatically. A percentage increase chosen under a discretionary power is not a ‘relevant percentage’ for the purpose of the deferred member carve-out.
Late retirement increases by actuarial uplift factors
Deferred pensions are due to be paid from a ‘normal pension age’. There may be provision under the rules of a registered pension scheme which allows individuals to defer that benefit until a later date. If so, the deferred pension must, in accordance with preservation requirements, be increased at least actuarially to reflect its late start date and likely shorter pay period.
Typically, scheme rules might express the uplift as that set by the trustees, for example, ‘after obtaining the actuary’s advice, is reasonable having regard to the period of postponement but being reasonably satisfied that the value of the pension payable to the member is at least equal to the value required by the Preservation Requirements’. In general, this would not be exercised with an intention to ‘add’ value.
A typical calculation might be:
- pension due if retiring at age 65 - £50,000 per annum
- pension due if delaying drawing 1 year to age 66 - 10% actuarial uplift so £55,000 per annum
- actual increase in pension - £5,000
- but there is no ‘added value’ to the pension of £50,000 per annum that was payable at age 65.
The carve-out for deferred members can be read to encompass the late retirement actuarial enhancements described above, provided that the scheme rules on late retirement uplift have not changed so as to provide a greater uplift since 14 October 2010 and that the enhancement factor applied can be expressed as a percentage.
A review of the actuarial factors since 14 October 2010 that leads to a higher factor, but which is allowed for within a rule that was in force on 14 October 2010 would not disapply the carve-out provision.
Note - one of the features of the deferred member carve-out is that an increase might be in accordance with a scheme rule that was in force on the ‘relevant date’.
The ‘relevant date’ can be either 14 October 2010 or 6 April 2012. Only the 14 October 2010 date can apply for the purpose of the late retirement actuarial enhancements as the 6 April 2012 date applies only if the increase is ‘RPI based’ (PTM053920 has more details).
PTM053910 has more details about the deferred member carve-out generally.
Late retirement increases where member continues in service
Where an active member reached the scheme’s normal pension age and, continuing in service, does not take their benefits until after normal pension age and when the benefits to be paid are to be increased by the Trustees (having, in accordance with the scheme rules, considered advice from an actuary) solely to reflect that the benefits have been paid later than the member was entitled to receive them, then any such increase will not trigger a pension input amount. This is provided:
- the member was a deferred member throughout the pension input period (or a deferred member for part of the pension input period and a pensioner member for the remainder of the period) - see PTM053910 for the meaning of deferred member in this context
- the increase is in accordance with a provision in the scheme rules (predecessor scheme rules etc) on 14 October 2010
- the enhancement factor can be expressed as a percentage.
For the avoidance of doubt, this includes a case where the rules on 14 October 2010 set out an approach, and the rules are left unchanged, but the factors are reviewed from time to time, consistent with that approach.
Example
Andrew is an active member of a pension scheme that has a normal pension age of 60, at which point in time Andrew is entitled to a pension of £28,000 per annum. Andrew does not draw his pension on reaching age 60 and remains in service.
The end of the current pension input period for Andrew’s arrangement under the pension coincides with the date he reached age 60.
Under provisions in place in the scheme rules on 14 October 2010 Andrew ceases to accrue further pension in relation to service and salary from normal pension age and benefits are increased by a late retirement actuarial uplift.
The factor is assessed as +8% when Andrew reaches one year after normal pension age not having drawn benefit (that is, £30,200 per annum).
The uplift is +14% when Andrew reaches 2 years after normal pension age (that is, +6% between year 1 and 2 or an average of 7% for the 2 years).
The uplift is based on the factors in force from time to time but these are always set in accordance with the rule provisions in place on 14 October 2010, and result in the same uplift as would have applied for an identical member ‘B’ who had instead been a deferred pensioner with similar delay in drawing pension.
This approach results in Andrew being entitled to a pension of £40,000 per annum when he finally elects to take his pension at age 65, but the increases create no pension input amount in the years from age 60 up to drawing the benefit at 65.
The above may well mean that the actual factors being used and the extent to which they are reviewed during the year is not an issue for such cases.
The above does not hold where benefits continue to accrue because of, for example, an increase in pensionable pay or service.
Increases by reference to ‘best of’ between uplift factors and further service and salary
Where scheme rules require a ‘best of between late retirement actuarial uplift and benefits based on further service/salary’ calculation there would be no pension input amount if the late retirement actuarial uplift is the ‘better result’.
There would be a pension input amount if further service/salary gave the ‘better result’.
The ultimate position when an individual draws ‘better of’ benefits may be different from the year-by-year assessment of ‘better of’.
Example
Andrew is an active member of a pension scheme that has a normal pension age of 60, at which point in time he is entitled to a pension of £28,000 per annum. Andrew does not draw his pension on reaching age 60 and remains in service.
Under provisions in place in the scheme rules on 14 October 2010 Andrew’s pension of £28,000 at normal pension age is increased each year by a late retirement actuarial uplift factor.
Also, Andrew’s pension of £28,000 could be increased by reference to continuing service and/or salary after normal pension age if that gave the ‘better of’ result compared to the actuarial uplift factor.
When Andrew reaches the end of year one after normal pension age (for the purpose of this example this is also taken to coincide with the end of Andrew’s pension input period in relation to the pension of £28,000) and having not drawn benefits the late retirement actuarial uplift is +8% (the same uplift as would have applied for an identical member ‘B’ who had instead been a deferred pensioner with the same delay in drawing pension after normal pension age). Andrew’s payable pension is increased to £30,200 per annum at the end of year one after normal pension age.
Based on service and salary to the end of the first year after normal pension age, Andrew’s pension would have been £29,000.
As the ‘better of’ increase in this case is by reference to the late retirement actuarial increase factor there is no pension input amount in respect of the ‘increase’ of Andrew’s pension at the end of year one to £30,200 per annum as no further benefit has accrued in respect of Andrew.
When Andrew reaches the end of year two after normal pension age and having not drawn benefits the late retirement actuarial uplift is +14% which increases Andrew’s payable pension to £31,900.
Based on service and salary to the end of the second year after normal pension age, Andrew’s pension is now £32,500.
As the ‘better of’ increase at the end of year two is by reference to service and salary there is a pension input amount in respect of the increase of Andrew’s pension from that of £30,200 at the end of year one (uprated in line with CPI) to £32,500 at the end of year two.
Career average re-valued earnings schemes
A registered pension scheme might provide defined benefits on a ‘career average re-valued earnings’ basis. Sometimes such schemes are known as ‘CARE’ schemes.
A CARE scheme might provide revaluation of each year’s accrued benefits at a rate of RPI, which was set out in the scheme rules as at 14 October 2010.
It is possible for such a scheme - if such a structure was put in place - to specify that each year of accrual in the scheme arises within a separate defined benefits arrangement. If this occurs the consequence might be that the member would qualify, in each arrangement, as being a deferred member once that year had passed. This would allow the scheme and member to ignore all ‘past’ arrangements in relation to annual allowance, and calculation of the pension input amount would focus solely on the ‘open’ year.
If each year’s accrual arises in a separate arrangement, and provided the revaluation of accrued rights is in accordance with the scheme rules as at 14 October 2010 (or no more than the allowable CPI increase), the deferred member carve-out would apply to the arrangements attributable to pension input periods that ended in previous tax years.
Whether or not there are separate arrangements would be a matter of fact and dependent on the scheme construction. Where a scheme’s construction is amended on or after 14 October 2010 to ensure that each year’s accrual takes place in separate arrangements, HMRC would not be likely to consider such an amendment as avoidance although it would consider challenging appropriate cases.
PTM053910 has more details about the deferred member carve-out.