Scheme Pension - levelling option

mckayj

We have a client who wants to opt for a scheme pension with levelling Option , however, we have noticed that it could impact on her Annual Allowance as it counts as PIA. In this particular case the scheme administrators have advised the PIA is £78,500 , client has no carry forward so we are forced to look at cancelling the application and looking at other options. I haven't come across levelling option before - can anyone explain the correlation between this and the Annual Allowance/PIA. Many thanks

Andy_Schleider

Isn't this a PIE (Pension Increase Exchange)? If so, it could well impact her LTA. The value of her benefits will be tested against the LTA when the benefits are first taken. So (for instance) a pension of £48,000 per year would be multiplied by a factor of 20 to give a value of £960,000, which is within the LTA limit if there are no other pension rights. Any future increases to her pension income would be ignored

If she is being offered Pension Increase Exchange, the same calculation takes place, however the pension is much higher, and it is this which is tested against the LTA. In your example of £78,500, this would mean that the value of her benefits would be £1,570,000. This breaches the LTA and will be subject to a charge if there is no transitional protection in place.

Hope this helps

mckayj

Andy thanks for your comments. I see what your saying but this isn't Pie.initially I thought it was a bridging pension but just different terminology as the pension is higher from now until State pension age then it reduces when state pension starts being paid but that doesn't appear to be the case. The pension is only £6kp.a from now to SPA. The administrators say that by taking this levelling option it counts as benefit accrual, even though she is not an active member of the scheme. Its taken me a couple of weeks just to get this information and the pension input figure as they aren't very forthcoming with information.!!!

Jona

What is being "levelled"?

Are they saying you can level tranches (pre / post 97 / 04 etc) so they all increase by the same amount in payment - as presently some may escalate at different rates?

From that perspective I can see why it would be a pension input amount as there would be an ongoing future cost to the scheme in, say, changing a tranche that escalates by CPI to level it with a tranche that escalates by RPI.

But I could have the wrong end of the stick.....

mckayj

Thanks Jona , they are saying that the pension from now until State Pension Age is say £6k p.a then at State Pension Age it reduces to £32 p.a (quite a dramatic increase) but I think the levelling is more to do with having a bigger pension now until state pension then when that kicks in the income levels out (??). Having discussed with a colleague I "think" the accrual comes into effect because it is a cost to the scheme at outset to provide the bigger income until SPA. That's how I am understanding it now . I emailed the administrators (Mercers) yesterday for an explanation but still waiting on a response.

Jona

Yes - if they are talking about an increase to the level of pre SPA benefits then that carries a cost to the scheme in securing those benefits for the member and that is therefore a PIA.

mckayj

Thanks Jona everyday is a school day!!!