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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 relevant relievable amount for a defined benefits arrangement

Glossary PTM000001
   

How to calculate the relevant relievable amount for a defined benefits arrangement
Example of calculating the relevant relievable amount for a defined benefits arrangement 

How to calculate the relevant relievable amount for a defined benefits arrangement

Sections 226(3) and (4) Finance Act 2004

Where the individual’s arrangement under their recognised overseas pension scheme is a defined benefits arrangement, the defined benefits relevant relievable amount is established as follows:

  1. multiply the individual’s pension entitlement under the defined benefits arrangement as at the latest of the following dates by the relevant valuation factor of 20 (or a factor greater than 20 as agreed by HMRC):
* the date when the individual became someone who is not a relevant overseas individual (see [PTM095310](https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm095310))
* the date when benefits first began to accrue to or in respect of the individual under the recognised overseas pension scheme defined benefits arrangement, and
* 6 April 2006.

Where the defined benefits arrangement rules provide for a separate lump sum that is not a commutation of pension it is necessary to take that into account as well. That is done by adding to the amount resulting from the above calculation the separate lump sum entitlement that the individual has under the defined benefits arrangement as at the latest date above. This only applies if the lump sum entitlement is not linked to the individual’s pension entitlement so that their prospective pension entitlement is not reduced as a result of taking the lump sum.

  1. multiply the individual’s pension entitlement under the defined benefits arrangement as at the earliest of the following dates by the relevant valuation factor of 20 (or a factor greater than 20 as agreed by HMRC):
* immediately before the transfer was made,
* the date that the individual ceased to be someone who is not a relevant overseas individual, and
* the date when benefits ceased to accrue to or in respect of the individual under the recognised overseas pension scheme defined benefits arrangement.

Where the defined benefits arrangement rules provide for a separate lump sum that is not a commutation of pension it is necessary to take that into account as well. That is done by adding to the amount resulting from the above calculation the separate lump sum entitlement that the individual has under the defined benefits arrangement as at the earliest date above. This only applies if the lump sum entitlement is not linked to the individual’s pension entitlement so that their prospective pension entitlement is not reduced as a result of taking the lump sum.

  1. deduct the result of 1. from the result of 2.
  2. If the individual had not been a relevant overseas individual during another part of the overseas arrangement active membership period (see PTM095410) relating to the same defined benefits arrangement then the amount calculated in the same way in respect of that other part-period should be added to the amount at 3.

The individual’s pension entitlement under the defined benefits arrangement is the annual rate of pension which would be payable to or in respect of the individual if they became entitled to payment of it at the applicable date (as determined under 1 or 2 above). The individual’s lump sum entitlement under the defined benefits arrangement is the amount of lump sum which would be payable to or in respect of the individual if they became entitled to payment of it at the applicable date. Both the pension entitlement and the lump sum entitlement are established using the valuation assumptions set out in section 277 Finance Act 2004. They 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.

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Example of calculating the relevant relievable amount for a defined benefits arrangement

Eric transferred £1.21 million from his recognised overseas pension scheme defined benefits arrangement to a registered pension scheme on 6 June 2009.

Eric was working in France when he joined his recognised overseas pension scheme defined benefits arrangement on 6 March 2000. He came to work in the UK on 6 May 2006 and so became someone who is not a relevant overseas individual with effect from 6 April 2006. His pension entitlement as at 6 April 2006 was £30,000 p.a. He was also entitled to a separate lump sum of £60,000.

(£30,000 x 20) + £60,000 = £660,000

Eric returned to work in France on 6 May 2008 and so ceased to be someone who is not a relevant overseas individual with effect from 6 April 2009 whilst still accruing benefits under the scheme. His pension entitlement as at 6 April 2009 was £56,500 p.a. He was also entitled to a separate lump sum of £80,000.

(£56,500 x 20) + £80,000 = £1.21 million

The defined benefits relevant relievable amount is therefore £550,000 (£1.21 million - £660,000).