RPSM03101580 - Technical Pages: Protecting pension rights from tax charges: Valuing pension rights at 5 April 2006: Example of limited benefits - defined benefits rights
Retirement benefits scheme limit: example of limited benefits and defined benefits rights
Fran has uncrystallised pension rights in 2
retirement benefit schemes which both relate to
the same employer. She also has a benefit from an earlier
employment, commonly known as a retained benefit. Retained benefits
are defined in Appendix 1 of the IR 12 “Occupational Pension
Schemes Practice Notes”.
Her rights in the 2 schemes of her current employer are
valued separately for the purposes of paragraph 8 Schedule 36
Finance Act 2004 and do not take into account the retained benefit
see
RPSM03101050. Her rights in the 2
schemes have a total value of £3 million.
Under paragraph 9 Schedule 36 Finance Act 2004, the limit for
Fran’s pension rights at 5 April 2006 for her current
employment are calculated as the higher of
- one sixtieth of final remuneration for each year of pensionable service (subject to a maximum of 40 years) and
- the result obtained using the formula N/NS x (P-RB) where
- N is her actual pensionable service at 5 April 2006; 15 years,
- NS is her potential pensionable service to her normal retirement date in the schemes; 20 years,
- P is the maximum fraction of her FR which would have been permitted had the pensionable service ceased at her normal retirement date; (2/3 x £420,000 = £280,000),
- FR is the highest permissible amount for her pensionable earnings for the period ending on 5 April 2006; £420,000,
- RB is the value of the benefit from the earlier employment; a pension of £120,000 a year. (See RPSM03101590 for the valuation of retained benefits).
The calculation using sixtieths gives a figure of £105,000
while the formula produces a figure of £120,000. This is the
maximum permitted pension (MPP) for a pension coming into payment
on 5 April 2006. The capital value of the MPP is £2.4 million
(£120,000 x 20). The valuation factor for uncrystallised
pension rights on 5 April 2006 is always 20.
As the value of Fran’s rights under paragraph 9 are
lower than the value under paragraph 8 (£3 million), £2.4
million is the value which can be protected for her current
employment.
| Glossary ( RPSM20000000) |
