RPSM03102060 - Technical Pages: Protecting pensions rights from tax charges: Primary protection: Example of increase

Example of primary protection factor increase due to compensation

David is a member of a hybrid arrangement that provides benefits of the higher of

• benefits provided on an other money purchase basis, or
• defined benefits of 1/60th pensionable salary for each year of service.

On 5 April 2006 David has accrued 30 years service and his pensionable salary is £225,000. This gives David benefits valued at £2.25 million

(30/60 x £225,000) x 20 = £2.25 million

The value of the funds in David’s arrangement on 5 April 2006 is £2 million.

So the value of the uncrystallised rights in David’s hybrid arrangement is £2.25 million giving David a primary protection factor of 0.5.

(£2.25 million - £1.5 million)/£1.5 million = 0.5

In June 2008 compensation worth £200,000 is paid to David’s hybrid arrangement. This will not affect David’s primary protection factor because when the £200,000 compensation is added to the fund value on 5 April 2006 of £2 million the resulting £2.2 million is still less than the £2.25 million originally protected.

However if the hybrid arrangement had received compensation worth £400,000 David’s primary protection factor would be increased to 0.6.

The compensation of £400,000 added to the fund value on 5 April 2006 of £2 million gives a total of £2.4 million, which is £150,000 more than the original protected amount of £2.25 million. So ‘RR’ is increased by £150,000 to give

(£2.4 million - £1.5 million)/£1.5 million = 0.6.