Added pension can be purchased either by a lump sum or by regular annual contributions.
The factors for the purpose of this calculation are per £1 pa of added pension purchased.
The factors should be selected with reference to the member's:
- age in complete years,
- whether the pension is for the member only, or for all beneficiaries,
- sex, if buying member only benefits, (however please note that the male and female factors are unisex),
- normal pension age (NPA) (NPA is defined as a member's state pension age (or 65, if that is higher) in the alpha section), and
- for the revaluation factor, the number of 1 Aprils falling between the calculation date and the NPA.
If a member has a non-integer NPA then more than one factor is required and these factors are interpolated to obtain the actual factor to use corresponding to their NPA (in complete years and complete months, ignoring part months).
The formula to use for a member with a non-integer NPA of Y years and M complete months is as follows:
Factor(NPA(Y, M)) = Factor(NPA(Y)) + (M/12) x [Factor(NPA(Y+1)) - Factor(NPA(Y))]
We have simplified the presentation of the interpolation formula compared to that which may have been used in previous guidance examples, but the effect of the formula is the same as the old formulation i.e it gives the same answer, so there is no need to update administration systems.
If a member purchases added pension by a lump sum payment, then the amount credited is either that set out on any statement of amount of added pension given to the member following their election to buy added pension by lump sum, or the amount determined as at the date of receipt of payment by the member if this occurs more than 1 month after the date of the statement.
To purchase a specific increase to a member's pension for the relevant scheme year, then the lump sum payment (LS) required is determined as follows:
LS = P x FxLS x FyReval
Where:
P is the amount of added pension purchased
x is the member's age in complete years on the date of calculation
FxLS is the lump sum factor at age x from the appropriate NPA table (Tables x-701 to x-704 of the consolidated factors workbook)
FyReval is the relevant revaluation factor for a member with y 1 Aprils between calculation date and up to and including NPA (Table x-001)
The calculation date is either
- the date of the statement of amount of added pension to be purchased, or
- the date of receipt of payment (if this occurs more than 1 month after the date of the statement).
The amount of added pension, P, added to a member's pension for the relevant scheme year in respect of a lump sum payment received is determined as follows:
P = LS / (FxLS x FyReval)
Where:
LS is the amount of lump sum payment
x is the member's age in complete years on the date of calculation
FxLS is the lump sum factor at age x from the appropriate NPA table (Tables x-701 to x-704 of the consolidated factors workbook)
FyReval = relevant revaluation factor for a member with y 1 Aprils between calculation date and up to and including NPA (Table x-001 of the consolidated factors workbook)
The calculation date is either
- the date of the statement of amount of added pension to be purchased, or
- the date of receipt of payment (if this occurs more than 1 month after the date of the statement).
The factors for the purpose of this calculation are per £1 pa of added pension purchased.
A member may buy added pension by opting for a deduction from their pensionable earnings expressed as either a fixed amount or percentage of their pay. Unless the member opts to buy added pension within 3 months of joining the scheme, this will start from beginning of the next scheme year.
Factors should be selected with reference to the member's:
- age in complete years,
- whether the pension is for the member only, or for all beneficiaries,
- sex, if buying member only benefits, (however please note that the male and female factors are unisex),
- normal pension age (NPA), and
- for the revaluation factor the number of 1 Aprils falling between the calculation date and the NPA.
If a member has a non-integer NPA then more than one factor is required and these factors are interpolated to obtain the actual factor to use corresponding to their NPA (in complete years and complete months, ignoring part months). Please see the Lump sum election section above for the interpolation formula.
The scheme year runs from 1 April to 31 March.
To calculate the amount of added pension to be awarded for a given scheme year, the total amount of periodic contributions over the scheme year is required.
The amount of pension added for a scheme year needs to be adjusted to allow for any variations during the year in the level of contributions due to pay awards, members exiting active service or periods of assumed pay, and the commencement of payments falling later than the start of the scheme year (in the case of members starting to buy added pension by periodic payments within 3 months of joining the scheme).
The amount of added pension, P, added to a member's pension at the end of the period of contributions during that scheme year is determined as follows:
P = C / (FxPC x FyReval)
Where:
C is the total amount of periodic contributions over scheme year
x is the member's age in complete years at the start of scheme year or start of the period of payment if later (ie at the calculation date)
FxPC is the regular contribution factor at age x from corresponding NPA table (Tables x-705 to x-708 of the consolidated factors workbook)
FyReval is the relevant revaluation factor for a member with y 1 Aprils (from the day after the date of commencement of contributions) up to and including NPA (Table x-001 of the consolidated factors workbook)
The amount of level monthly payments, MP, required to purchase a given amount of added pension if paid over a single full scheme year is determined as follows:
MP = (P x FxPC x FyReval) / 12
Where:
P is the amount of added pension the member wishes to buy
x is the member's age in complete years at the start of the scheme year or start of the period of payment if later
FxPC is the regular contribution factor at age x from corresponding NPA table (Tables x-705 to x-708 of the consolidated factors workbook)
FyReval is the relevant revaluation factor for a member with y 1 Aprils (from the day after the date of commencement of contributions) up to and including NPA (Table x-001 of the consolidated factors workbook)
The formula used for the calculation of level monthly payments above should only be used for illustrative purposes and only for cases where level payments are to be made over a complete scheme year. It is not appropriate for cases where a percentage of salary is to be paid to buy added pension.
