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HMRC internal manual

Pensions Tax Manual

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Protection from the lifetime allowance charge: lifetime allowance enhancement factors: The non-residence factor for cash balance arrangements

Glossary PTM000001
   

 

How to calculate the non-residence factor for a cash balance arrangement
Example of calculating the non-residence factor for a cash balance arrangement
How to calculate the non-residence factor for a cash balance arrangement if primary protection has also been claimed
Example of how to calculate the non-residence factor if primary protection has also been claimed

How to calculate the non-residence factor for a cash balance arrangement

Sections 222(3) to (5) and 277 Finance Act 2004

For each part of an active membership period (see PTM095310) during which the individual is a relevant overseas individual (see PTM095310), the cash balance arrangement non-residence factor is established as follows:

  1. obtain the value of the individual’s rights under the cash balance arrangement as at the latest of the following dates:
* the date when the individual became a relevant overseas individual
* the date when benefits first began to accrue to or in respect of the individual under the cash balance arrangement, and
* 6 April 2006.
  1. obtain the value of the individual’s rights under the cash balance arrangement as at the earliest of the following dates:
* immediately before the benefit crystallisation event,
* the date when the individual ceased to be a relevant overseas individual, and
* the date when benefits ceased to accrue to or in respect of the individual under the cash balance arrangement.
  1. deduct the value of 1 from the value of 2.
  2. Express the resulting amount in 3 as a factor of the standard lifetime allowance as at the earliest date in 2.

If there was an earlier part of the active membership period relating to the same arrangement during which the individual was a relevant overseas individual the two factors for the two part-periods should be aggregated.

The individual’s rights under the cash balance arrangement are represented by the amount which would be available to provide benefits to or in respect of the individual if they became entitled to the immediate payment of them at the applicable date (as determined under 1 or 2 above). The value of the individual’s rights is established using the valuation assumptions set out in section 277 Finance Act 2004. These are as follows:

  • the individual concerned has reached any designated age as must have been reached to avoid any reduction in their benefits on account of their age, and
  • their benefits should be valued on the basis that they are not physically or mentally impaired.

Exceptionally, the opening value calculated at 1 above is modified where the individual has also notified HMRC that they are claiming primary protection under paragraph 7(1)(b) of schedule 36 (see PTM092300). The modification is to prevent the individual qualifying for two lifetime allowance enhancement factors in respect of the same increase in benefits. Guidance on how that calculation is modified is provided further below.

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Example of calculating the non-residence factor for a cash balance arrangement

Lee began to accrue benefits under his cash balance arrangement on 6 April 2004. He was seconded to work overseas on 24 October 2006 so he became a relevant overseas individual on 6 April 2007. The value of his pension rights in his cash balance arrangement as at 6 April 2007 amounted to £500,000.

Lee returned to work in the UK on 6 May 2011 (before a benefit crystallisation event and before he ceased to accrue benefits under the cash balance arrangement). He therefore ceased to be a relevant overseas individual on 5 April 2011. The value of his pension rights in his cash balance arrangement as at 5 April 2011 amounted to £950,000.

£950,000 - £500,000 = £450,000

The cash balance arrangement non-residence factor is therefore 0.25. That is calculated by dividing £450,000 by the standard lifetime allowance for the 2010-2011 tax year (£1.8million).

£450,000/£1.8 million = 0.25

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How to calculate the non-residence factor for a cash balance arrangement if primary protection has also been claimed

Articles 12 & 13 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/131

Where the individual is also claiming primary protection, the calculation of the opening value at 1 in How to calculate the non-residence factor for a cash balance arrangement above is modified if the individual would have been a relevant overseas individual in the 2005-06 tax year had the definition of a relevant overseas individual (see above - section 221(3) Finance Act 2004) been in force then, and if the conditions in either a or b below are met:

  1. The individual has notified HMRC of their entitlement to a non-residence factor where the active membership period in relation to the cash balance arrangement began on 6 April 2006, and notifies - or has already notified - HMRC of their intention to rely on primary protection.
  2. The individual has notified HMRC of their intention to rely on primary protection, and notifies - or has already notified - HMRC of their entitlement to a non-residence factor where the active membership period in relation to the cash balance arrangement began on 6 April 2006.

The value at 1 in How to calculate the non-residence factor for a cash balance arrangement above is calculated instead by:

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Example of how to calculate the non-residence factor if primary protection has also been claimed

Jeff, who is working in Italy and would have been a relevant overseas individual in 2005/06 had the definition existed and applied at that time. He has claimed primary protection. The value of his pension rights in his cash balance arrangement as at 5 April 2006 amounted to £1 million.

He returned to work in the UK on 14 November 2011 (before a benefit crystallisation event and before he ceased to accrue benefits under the cash balance arrangement). He therefore ceased to be a relevant overseas individual on 5 April 2011. The value of his pension rights in his cash balance arrangement as at 5 April 2011 amounted to £1.56 million.

The opening value used in calculating his non-residence factor is £1.2 million. That is arrived at by multiplying £1 million by 1.2, which is the product of dividing £1.8 million (the standard lifetime allowance for the 2010-2011 tax year) by £1.5 million. The difference between that opening value and the closing value of Jeff’s rights in the arrangement is £360,000 i.e. £1.56 million minus £1.2 million.

The cash balance arrangement non-residence factor is therefore 0.2. That is calculated by dividing £360,000 by £1.8 million (the standard lifetime allowance for the 2010-2011 tax year).