There is a maximum overall amount of extra pension a member can purchase in the career average section. The maximum overall amount was £6,500 per annum for the financial year 2015-16. Thereafter, the overall maximum amount is determined by HM Treasury and is normally increased annually in line with the Pensions Increase Act.
This limit does not apply to the buy-out election. However, the value of the extra pension purchased through a buy-out election (the 'buy-out value') does count against the extra pension limit if the member wishes to make a subsequent faster accrual or additional pension election.
The buy-out value should be calculated using the formula below:
Buy-out value = FM x PE x FS x N
where:
PE is the member's actual rate of pensionable earnings at the time of making the buy-out election.
FS is the buy-out value factor from Table BO2 relating to the number of years between the member's age (in complete years and months) at the time of entering service under the career average section and their 'buy-out retirement age' (which is described below).
N is the number of years for which the standard reduction has been bought out.
FM is the multiplier factor from Table BO3
The relevant factors are set out in tables x-723 and x-729 in the Consolidated Factors Workbook.
For a member who is in part-time employment, PE is the rate of pensionable earnings the member is receiving at the time of making the buy-out election, not the full-time equivalent rate.
A member's buy-out retirement age is equal to the member's expected NPA (which is defined as a member's state pension age as defined in legislation (or 65, if that is higher) in the career average section) less the number of years for which the standard reduction has been bought out. The buy-out value should be calculated at the time of the election.
If a member subsequently makes a faster accrual election or an additional pension election, the buy-out value needs to be compared with the extra pension limit, to determine the remaining headroom available to the member. The buy-out value needs to be increased in line with inflation between the date the member entered pensionable service under the career average section and the date of any faster accrual or additional pension election.
It will be necessary to revisit the original buy-out value calculation when a buy-out election is revoked. In this instance, the original buy-out value should be revised in a proportional manner based on:
- the actual number of years for which a member made contributions; and
- the number of years a member was expected to make contributions for, i.e. the number of years between the member's age (in complete years and months) at the time of entering service under the career average section and their buy-out retirement age.
The buy-out election may also apply to a faster accrual election. The buy-out value factors set out in tables x-723 and x-729 in the Consolidated Factors Workbook only apply to the accrual of a member's normal scheme pension. The extra pension purchased through a buy-out election applying to any additional accrual gained through a faster accrual election will be included in the extra pension check carried out for the faster accrual election.
