RPSM03101540 - Technical Pages: Protecting pension rights from tax charges: Valuing pension rights at 5 April 2006: Example of limited benefits - Money purchase rights

Retirement benefits scheme limit: example of limited benefits and money purchase rights

Example

John joined his employer’s retirement benefit scheme in 1975 at age 22. His normal retirement age under the arrangement is 65. John has money purchase rights under the arrangement. He has no other pension rights.

As his employment continues after 5 April 2006, he is deemed to have left employment and pensionable service on that date. The calculation of MPP is made on the basis that the DWP’s preservation legislation applies.

John’s final remuneration from the employment on 5 April 2006 is £90,000.

Because of preservation, John’s MPP is £60,000 (being 2/3x £90,000), with a value of £1.2 million (20 x £60,000).

John’s pension rights held under the arrangement had a market value of £1.5 million on 5 April 2006.

But the value of his protected pension rights is limited to £1.2 million.

If 5 April 2006 falls before an individual’s normal retirement date in a retirement benefit scheme and the individual has employer sponsored money purchase rights in the scheme, the calculation of MPP should be done on the basis that preservation applies to the benefits. The particular form of the preservation calculation to be used depends on when the retirement benefit scheme was approved. The relevant preservation calculation will be the one published in whichever version of the IR 12 “Occupational Pension Schemes Practice Notes” was in force when the scheme was approved. RPSM03101550 to RPSM03101570 detail the preservation limits that apply from 1 October 1974 to 5 April 2006.