How are benefits valued when testing against the standard lifetime allowance for defined benefit schemes?
Defined benefit schemes can only offer a scheme pension. A scheme pension involves paying a pension for life out of the scheme assets or buying an annuity out of the scheme assets. The value of the annual amount of pension promised by the scheme is multiplied by a standard valuation factor of 20:1. This factor includes an allowance for dependants benefits up to the level of the member’s pension at date of death and for annual increases of 5%. Any defined benefit scheme that provides better levels of dependants pensions or increases can apply to HMRC for a scheme specific valuation factor which can be higher than 20:1. Defined lump sums (otherwise than by commutation) are valued using a factor of 1:1 and are added to the above value.
