Paragraphs 26 and 27 of Schedule 7 of the Pensions Act 2004 set out the circumstances in which the compensation cap applies and how and when it should be increased.
The compensation cap is also used in valuation calculations required under Sections 179 and 143 of the Pensions Act 2004. You can find out more about how it’s applied under these sections in Valuation guidance.
Compensation cap changes
From 1 April each year, the compensation cap is reviewed to reflect the increase in the general level of earnings in Great Britain since the previous tax year. The cap also varies with the scheme member's age last birthday.
You should use the following tables for calculating compensation and for Section 143 and 179 valuations with effective dates:
- from 1 April 2020 up to and including 31 March 2021
- from 1 April 2019 up to and including 31 March 2020
- from 1 April 2018 up to and including 31 March 2019
- from 1 April 2017 up to and including 31 March 2018
- from 1 April 2016 up to and including 31 March 2017
- from 1 April 2015 up to and including 31 March 2016
- from 1 April 2014 up to and including 31 March 2015
You can also view factors that were valid for previous periods
Compensation cap adjustments
Here’s an example of how compensation cap adjustments are calculated:
Two early retirees, a 57 and a 55 year old, would receive exactly the same actuarial value of benefits from us. However the capped 57 year old will get a higher pension than the capped 55 year old because the younger member is expected to receive the compensation for a longer time.
Factors to calculate the value of an annualised lump sum
The compensation cap must be compared with an annual value of benefits.
These factors are used to work out the application of the compensation cap. They apply only to annualised cash lump sum benefits, which have been accumulated alongside pension benefits. They don’t apply to lump sums resulting from commutation.
Please note that factors for those under age 50 may be needed for the purposes of a Section 179 valuation, where cash lump sum benefits have accrued on death before retirement.
The factors, required by paragraph 26 (7) of Schedule 7 of the Pensions Act 2004, are set out in the tables below and should be used for calculations with effective dates:
- from 1 October 2020
- from 1 October 2019
- from 1 November 2018
- from 1 November 2017 to 31 October 2018
- from 1 April 2015 to 31 October 2017
- from 1 August 2012 to 31 March 2015
- from 1 August 2011 to 31 July 2012
- from 1 April 2010 to 31 July 2011
- from 1 January 2009 up to and including 31 March 2010
- from 11 September 2006 up to and including 31 December 2008
- from 6 April 2005 up to and including 10 September 2006
Please note: From time to time we will review these factors, which will be subject to change.