There is a maximum overall amount of extra pension a member can purchase in the career average section. Any extra pension purchased through a buy-out election, faster accrual election or additional pension election will count against the extra pension limit.
When a member makes a faster accrual election, a check needs to be carried out to ensure the member has enough headroom within the overall extra pension limit to purchase the desired rate of faster accrual. The value of the extra pension purchased through a faster accrual election (the 'faster accrual value') therefore needs to be calculated at the time of the election.
The faster accrual value will depend on whether or not a member's buy-out election also applies to any extra pension purchased through the faster accrual election. A different formula is therefore used depending on the situation.
The faster accrual value should be calculated using the formula below:
Faster accrual value = PE x (M/12) x FY
where:
- PE is the member's actual rate of pensionable earnings at the date the faster accrual election takes effect
- M is the number of complete months between the date the faster accrual election takes effect and the end of the financial year.
- FY is the faster accrual value factor from Table FAV1 (Table 727 in Consolidated Factors Workbook), selected with reference to:
- the chosen rate of faster accrual; and
- the number of years between the member's age (last birthday) at the date the faster accrual election takes effect and the member's expected NPA. For a member with a non-integer NPA, their expected NPA should be rounded down to the nearest whole number.
The relevant factors are set out in Factor Tables.
NPA is defined as a member's state pension age (or 65, if that is higher) in the career average section. For the purpose of this note, a member's expected NPA in the career average section is the same as their state pension age as set out in the HMT directions.
For a member who is in part-time employment, PE is the rate of pensionable earnings the member is receiving at the time the faster accrual election takes effect, not the full-time equivalent rate.
The Examples cover the faster accrual value calculation when a member does not have a buy-out election which applies to their faster accrual election.
The faster accrual value should be calculated using the formula below:
Faster accrual value = PE x (M/12) x FY x [1 + (FAF x N)]
where:
- PE is the member's actual rate of pensionable earnings at the date the faster accrual election takes effect
- M is the number of complete months between the date the faster accrual election takes effect and the end of the financial year.
- FY is the faster accrual value factor from Table FAV1 (Table 727 in Consolidated Factors Workbook), selected with reference to:
- the chosen rate of faster accrual; and
- the number of years between the member's age (last birthday) at the date the faster accrual election takes effect and the member's 'buy-out retirement age'. For a member with a non-integer buy-out retirement age, their buy-out retirement age should be rounded down to the nearest whole number.
- N is the number of years for which the standard reduction has been bought out under the buy-out election.
- FAF is the faster accrual value buy-out factor from Table 730 in the Consolidated Factors Workbook.
The relevant factors are set out in Factor Tables.
For a member who is in part-time employment, PE is the rate of pensionable earnings the member is receiving at the time the faster accrual election takes effect, not the full-time equivalent rate.
A member's buy-out retirement age is equal to the member's expected NPA less the number of years for which the standard reduction has been bought out.
The Examples cover the faster accrual value calculation when a member does have a buy-out election which applies to their faster accrual election.
It will be necessary to revisit the original faster accrual value calculation if a member revokes or is taken to revoke their faster accrual election and does not receive a repayment of their contributions. In this instance, the original faster accrual value should be revised in a proportional manner based on the number of months the member actually paid their contributions.
If a member subsequently makes another faster accrual election or an additional pension election, the faster accrual value from any earlier elections needs to be compared with the extra pension limit, to determine the remaining headroom available to the member. The faster accrual value needs to be increased in line with inflation between the time the faster accrual election takes effect and the date of any subsequent faster accrual or additional pension election.
