PTM175320 - Lump sum allowance and lump sum and death benefit allowance: Enhancement factors: Non-residence factor: Cash balance arrangement

As of 6 April 2024 there is no longer lifetime allowance. If you are looking for information about protections, enhancement factors and the lifetime allowance charge please see these pages on The National Archives. If you are looking for information about the principles of lifetime allowance and benefit crystallisation events please see these pages of The National Archives.

If you are looking for information about enhancement factors pre-April 2024 please see The National Archive.  The below guidance applies for individual’s seeking an enhancement factor from 6 April 2024 to 5 April 2025.

How to calculate the non-residence factor for a cash balance arrangement
Pension entitlement
Example of calculating the non-residence factor for a cash balance arrangement

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

Paragraph 20C(3) and (4) Schedule 36 and 277 Finance Act 2004 

For each part of an active membership period during which the individual is a relevant overseas individual, the defined benefits arrangement non-residence factor is established as follows: 

1. Select the individual’s pension entitlement 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 the benefits first began to accrue to or in respect of the individual under the defined benefits arrangement, and 
  • 6 April 2006. 

Multiply this figure by the relevant valuation factor of 20, or greater than 20 as agreed by HMRC. 

2. Then multiply he individual’s pension entitlement under the cash balance arrangement as at the earliest of the following dates by the relevant valuation factor of 20 (or greater if agreed by HMRC): 

  • Immediately before the benefit payment,
  • The date when the individual ceased to be a relevant overseas individual, and 
  • The date when the benefits ceased to accrue to or in respect of the individual under the defined benefits arrangement, and 
  • The 5 April 2024 

3. Deduct the result of step 1 from the result of step 2.  

4. Divide the result of step 3 by £1,000,000.

5. Express the result of step 4 as an enhancement factor. The factor should go to two decimal places. This should be a rounded-up figure, so for example if the calculation provides a factor of 0.231 this becomes 0.24.

This figure is then applied to the individual’s lump sum and death benefit allowance availability once a relevant benefit crystallisation event occurs.  

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.

Pension entitlement 

The individual’s pension entitlement under the cash balance arrangement areis 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 step 1 or step 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. 

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 2014 so he became a relevant overseas individual on 6 April 2015. The value of his pension rights in his cash balance arrangement as at 6 April 2015 amounted to £500,000.

Lee returned to work in the UK on 6 May 2020, before a payment of benefits and before he ceased to accrue benefits under the cash balance arrangement). He therefore ceased to be a relevant overseas individual on 5 April 2020. The value of the pension rights in his cash balance arrangement as at 6 April 2020 amounted to £950,000.

£950,000 - £500,000 = £450,000

£450,000 / £1,000,000 = 0.45

Lee’s cash balance arrangement non-residence factor is therefore 0.45.