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Glossary PTM000001

Note 鈥� for tax year 2015-16 there are transitional rules for calculating pension input amounts. PTM058070 has more details.

Section 236(8) Finance Act 2004

The increased amount of a member鈥檚 annual rate of pension represented by a temporary bridging pension is included as part of the pension input amount calculation.

However, the member may have the option to exchange the bridging pension for an amount of 鈥榳hole-life鈥� pension. Such an option is likely to result in the member鈥檚 initial annual rate of pension being a lesser amount.

There is an 鈥榓dd-back鈥� provision for adjusting the closing value for the pension input amount for defined benefits arrangements when, in the pension input period, the annual rate of the pension to which the member would be entitled under the arrangement has been reduced by a surrender in return for another entitlement or similar action. Such a reduction must have been made under an option available to the member under the arrangement.

This add-back will not happen if the scheme rules are changed so that the bridging pension is exchanged for a whole-life pension automatically rather than at the option of the member.

Example 1 - automatic bridging pension paid

Member has a normal pension age of 65. The main provision of the scheme is whole-life pension. But when a member retires from service before age 65, a bridging pension is paid automatically until age 65.

The normal pension age rule specifies that the member鈥檚 benefit on retirement at normal pension age is a whole-life pension of service at normal pension age x 1/60ths of final pensionable salary at normal pension age.

Under the rule for earlier retirement the formula is similar but with a reduction for early payment and also an automatic bridging pension of service x 1/80ths x the basic State Pension at normal pension age.

Just before the beginning of the pension input period, the member has service of 30 years, final pensionable salary of 拢60,000 and basic State Pension is 拢5,000.

At end of the pension input period final pensionable salary is 拢64,000 and the basic State Pension is 拢5,100 but the member immediately retires early at age 64 with an early retirement reduction of 4%.

Pension input amount:

• opening value:
  • step 1 - find annual rate of pension entitlement just before start of the pension input period for annual allowance purposes
  • the member is still in service and has not exercised any option to retire early so the pension rate to reflect is the default whole-life pension
  • 鈥楶B鈥� = 30/60 x 拢60,000 = 拢30,000
  • step 2 - multiply result by 16
  • 拢30,000 x 16 = 拢480,000
  • step 3 - add on any separate lump sum entitlement
  • none so running total is 拢480,000
  • step 4 - increase amount for CPI (for the purpose of this example assume relevant CPI increase is 3%)
  • 拢480,000 x 1.03 = 拢494,400
• closing value:
  • step 1 - find annual rate of pension entitlement at end of the pension input period for annual allowance purposes
  • 鈥楶E鈥� under the valuation assumptions is zero initially because the member has started to draw all benefits and no benefits are uncrystallised in the arrangement
  • but during the pension input period the member started scheme pension so had a BCE 2, for which the starting pension rate was as follows
  • [31/60 x 拢64,000 x 0.96 (early retirement reduction) = 拢31,744.00] + [31/80 x 拢5,100 = 拢1,976.25] = 拢33,720.25
  • there has been no surrender (choosing an early retirement pension instead of a deferred pension on leaving is not a 鈥榮urrender鈥�) so even though the pension reduced because of retiring early this does not trigger an add-back adjustment
  • step 2 - multiply result by 16
  • 拢33,720.25 x 16 = 拢539,524.00
  • step 3 - add on any separate lump sum
  • none so running total is 拢539,524.00
• if there are no other adjustments to the closing value, the pension input amount is 拢45,124 (拢539,524.00 - 拢494,400)
• the part of this arising from the increased start level of pension due to the temporary pension is 拢31,620.00 (拢1,976.25 x 16).

Note that the bridging pension causing this extra pension input amount was a pension of 拢1,976.25 payable for one year.

As the option to retire before normal pension age (and the automatic bridging pension that comes with it) only happens at retirement, there is no allowance for the temporary pension for pension input periods prior to retirement. Whether the member triggers an annual allowance charge will depend on the availability of unused annual allowance to carry-forward.

Example 2 - automatic bridging pension exchanged for whole-life pension option

This example is the same as example 1 above except that the member does not want the bridging pension and asks the trustees to exchange it for a lower whole-life pension, which the trustees accept. Instead of paying a bridging pension for one year of 拢1,976.25, the member gets a whole-life pension of 拢90.00 per annum.

Pension input amount:

• opening value - the same as example 1
• closing value:
  • step 1 - find annual rate of pension entitlement at end of the pension input period for annual allowance purposes
  • 鈥楶E鈥� under the valuation assumptions is zero initially because the member has started to draw all benefits and no benefits are uncrystallised in the arrangement
  • but during the pension input period the member started scheme pension so had a BCE 2, for which the starting pension rate was as follows
  • [31/60 x 拢64,000 x 0.96 (early retirement reduction) = 拢31,744] + [拢90] = 拢31,834
  • for annual allowance purposes, in the pension input period 鈥渢he annual rate of the pension to which the individual would be entitled under the arrangement has been reduced by any surrender made in return for any other entitlement, any allocation made, or any similar action taken, pursuant to an option available to the individual under the arrangement鈥�, so the amount of the reduction (to the extent that it is not reflected in an amount added under a BCE) is to be added to 鈥楶E鈥� or 鈥楲SE鈥�
  • here, choosing an early retirement pension instead of a deferred pension on leaving is not a 鈥榮urrender鈥� so even though the whole-life pension of service at normal pension age x 1/60ths of final pensionable salary at normal pension age was reduced because of retiring early this does not trigger an add-back adjustment
  • however, the exchanging of the bridging pension for the whole-life pension of 拢90 does trigger an add-back
  • the amount of the bridging pension exchanged (to the extent that it is not reflected under a BCE) is added back
  • here some of the exchanged bridging pension has been reflected in the BCE (拢90 in this case) so the amount of the add-back for the bridging pension is 拢1,886.25 (拢1,976.25 less 拢90)
  • an amount of 拢33,720.25 (拢31,744 + 拢90 + 拢1,886.25) is to be added to PE
  • step 2 - multiply result by 16
  • 拢33,720.25 x 16 = 拢539,524
  • step 3 - add on any separate lump sum
  • none so running total is 拢539,524
• if there are no other adjustments to the closing value, the pension input amount is 拢45,124 (= 拢539,524 - 拢494,400).

The pension input amount outcome would be unchanged from example 1, that is, a pension input amount of 拢45,124, of which 拢31,620 ([拢1,886.25 x 16] + [拢90 x 16]) arises solely because of the bridging pension.

Example 3 - changing scheme rules

Same as examples 1 and 2 above except that the conversion of the temporary bridging pension into a whole-life pension is made unilaterally by the scheme trustees, and not 鈥減ursuant to an option available to the member鈥�.

Pension input amount:

• opening value - same as example 1
• closing value:
  • step 1 - find annual rate of pension entitlement at end of the pension input period for annual allowance purposes
  • 鈥楶E鈥� under the valuation assumptions is zero initially because the member has started to draw all benefits and no benefits are uncrystallised in the arrangement
  • but during the pension input period the member started scheme pension so had a BCE2, for which the starting pension rate was as follows
  • [31/60 x 拢64,000 x 0.96 (early retirement reduction) = 拢31,744.00] + [拢90] = 拢31,834.00
  • as with examples 1 and 2, reduction to the whole-life pension of service at normal pension age x 1/60ths of final pensionable salary at normal pension age because of retiring early does not trigger an add-back adjustment
  • however, unlike example 2, there is no add-back adjustment for the amount of the bridging pension not reflected under the BCE
  • step 2 - multiply result by 16
  • 拢31,834 x 16 = 拢509,344
  • step 3 - add on any separate lump sum
  • none so running total is 拢509,344
• if there are no other adjustments to the closing value, the pension input amount is 拢14,944.00 (= 拢509,344- 拢494,400).

If the trustees consider (subject to the provision for change in the scheme鈥檚 rules) changing the scheme rules before the pension input period in which member retires early, which rule change is made with the members鈥� consents (or individual request), the rule change has no impact on calculations for the pension input period in which the change is made (because it does not change the normal pension age rule). If and when in future pension input periods the member chooses to draw pension before normal pension age with age reduction, the BCE2 reflects the actual pension underlying the BCE2 (that is, not the bridging but the replacement whole-life pension instead of the bridging pension).