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HMRC internal manual

Pensions Tax Manual

Protection from the lifetime allowance charge: lifetime allowance enhancement factors: pension credit factor

Glossary PTM000001
   

Qualifying for a pension credit factor
Calculating a pension credit factor
Calculating APC for the pension credit factor
Notification procedure for the pension credit factor

Qualifying for a pension credit factor

Section 220 Finance Act 2004

Where pension credit rights were acquired on or after 6 April 2006 a lifetime allowance enhancement factor known as the pension credit factor can be given. The ex-spouse’s or former civil partner’s lifetime allowance is enhanced by applying the pension credit factor. To qualify for a pension credit factor the following conditions must be met:

  • the pension credit is held in a registered pension scheme and was acquired on or after 6 April 2006, and
  • it’s derived from a pension benefit from the same or another registered pension scheme that was already in payment to the original member at the time of the pension sharing order, and
  • the original member became entitled to that pension in payment on or after 6 April 2006.

No entitlement to a pension credit factor arises if an individual acquires pension credit rights on or after 6 April 2006 but those rights were derived from

  • the pension of their ex-husband, ex-wife or former civil partner (the original member) that was in payment at the time of the pension sharing order but which came into payment before 6 April 2006, or
  • rights held by that ex-husband, ex-wife or former civil partner (the original member) that had not been crystallised at the time of the pension sharing order.

Calculating a pension credit factor

Where an individual (an ex-spouse or former civil partner of a member) acquires pension credit rights derived from a pension already in payment to their ex-husband, ex-wife or former civil partner (the original member), whose entitlement to that pension in payment arose after 5 April 2006 (making it a post-commencement pension in payment), that pension will already have been tested for lifetime allowance purposes in relation to the original member’s lifetime allowance entitlement when the pension came into payment.

The lifetime allowance of the ex-spouse or former civil partner may be increased by an appropriate lifetime allowance enhancement factor to reflect the increased benefits provided by those pension credit rights. This ensures the pension credit rights (or the proportion of those rights attributable to a post-commencement pension in payment) are not tested again for lifetime allowance purposes when the ex-spouse or former civil partner crystallises those rights, this lifetime allowance enhancement factor is called the pension credit factor.

The pension credit factor is calculated by reference to the actual value of the pension credit rights derived from the pension in payment. The factor is the fraction of the standard lifetime allowance the relevant pension credit rights represented at the time the ex-spouse or former civil partner acquired those rights.

For example, if the pension credit rights are £150,000 at the time they are acquired by the ex-spouse or former civil partner and the standard lifetime allowance at that time is £1.5 million the pension credit factor is 0.1.

The pension credit factor is calculated by using the formula

APC/SLA

APC = the appropriate amount (see below for more detail) the pension credit rights attributable to a post commencement pension in payment represent

SLA = the standard lifetime allowance at the time when the rights are acquired.

This factor is then applied to the standard lifetime allowance at any future BCE to provide the uplift to the individual’s lifetime allowance for the purpose of that BCE unless:

  • the pension credit factor was generated before 6 April 2012, in which case the uplift for BCEs occurring on or after 6 April 2012, is provided by applying the factor to the figure of £1.8 million if this is more than the standard lifetime allowance. The uplift is then added to the standard lifetime allowance at the date of the BCE to arrive at the individual’s lifetime allowance, or
  • the pension credit factor was generated on or after 6 April 2012 but before 6 April 2014, in which case the uplift for BCEs occurring on or after 6 April 2014, is provided by applying the factor to the figure of £1.5 million if this is more than the standard lifetime allowance. The uplift is then added to the standard lifetime allowance at the date of the BCE to arrive at the individual’s lifetime allowance, or
  • the pension credit factor was generated on or after 6 April 2014 but before 6 April 2016, in which case the uplift for BCEs occurring on or after 6 April 2014, is provided by applying the factor to the figure of £1.25 million if this is more than the standard lifetime allowance.  The uplift is then added to the standard lifetime allowance at the date of the BCE to arrive at the individual’s lifetime allowance.

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Calculating APC for the pension credit factor

Section 220 Finance Act 2004

Where the pension credit rights consist entirely of rights to a post-commencement pension in payment the appropriate amount (APC) attributable to those rights is calculated in accordance with section 29(1) of Welfare Reform and Pensions Act 1999 (WRPA 1999), or Article 26(1) of Welfare Reform and Pensions (Northern Ireland) Order 1999 (WRP(NI)O 1999).

Where a proportion of the pension credit rights are attributable to a post-commencement pension in payment the appropriate amount will be calculated in one of two ways, either through

  • section 29(2) or (3)(b) of WRPA 1999 (or Article 26(2) or (3)(b) of WRP(NI)O 1999), or
  • section 29(3)(a) of WRPA 1999 (or Article 26(3)(a) of WRP(NI)O 1999).

The first provisions apply where the pension credit right is given as a percentage or a proportion of the donor’s pension rights. In these cases, it will be clear what portion of the credit is attributable to a post-commencement pension in payment, and it will be this portion that is used in APC.

The second provisions apply where the pension credit right is given as a specified amount, and so it may not be so clear what part of the credit relates to a post-commencement pension in payment. In these circumstances the credit is to be apportioned on a just and reasonable basis, so that the proportion relating to the donor’s post-commencement pensions in payment is used in APC.

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Notification procedure for the pension credit factor

Regulation 6 The Registered Pension Schemes (Enhanced Lifetime Allowance) Regulations 2006 S.I.2006/131

An individual has to notify HMRC of their entitlement to a pension credit factor. Notification should be made on form APSS 201 and received by HMRC no later than 5 years after 31 January following the tax year when the pension sharing order or provision took effect. So, for example, if an order took effect in the tax year 2015-16 the application should be made by 31 January 2022 at the latest.

HMRC will issue a certificate confirming the pension credit factor the individual is entitled to. HMRC will give each certificate its own reference number. The certificate is valid until such time as it is revoked or amended by HMRC. If after the claim has been made the individual learns that the information provided was incorrect, they must inform HMRC as soon as possible. If necessary, HMRC will then revoke the original certificate and issue an amended certificate, valid as above.