RPSM03104522 - Technical Pages: Protecting pension rights from tax charges: Enhanced protection: Relevant benefit accrual: Defined benefits and cash balance - example

Example of the relevant benefit accrual test for cash balance and defined benefits arrangements

Andrew has pension rights under four different arrangements. The benefits relate to two separate employments. On 5 April 2006 these are valued at

Arrangement 1 – defined benefits: £750,000

Arrangement 2 – cash balance: £250,000

Arrangement 3 – other money purchase: £50,000

Arrangement 4 – defined benefits: £300,000

Arrangements 1 to 3 relate to employer A. Arrangement 4 is in respect of employer B.

Two years later Andrew decides to take benefits from arrangement 1. The value of this benefit crystallisation event is £900,000.

For the relevant benefit accrual test the crystallised value of the benefits paid from arrangement 1 (£900,000) is compared to the value of all benefits provided by cash balance and defined benefits arrangements for employer A on 5 April 2006 (£1 million).

The amount of those rights on 5 April 2006 - £1 million – is re-valued in line with the legislation to give the ‘appropriate limit’. The £900,000 crystallised is less than the value of the protected defined benefits and cash balance benefits for employer A so there is no relevant benefit accrual.

Another two years later Andrew decides to take benefits from arrangement 2. The crystallised value of these benefits is £350,000. This means Andrew has now crystallised total benefits for employer A worth £1.25 million. (Note that the £900,000 taken two years earlier is not re-valued in line with the increase in the standard lifetime allowance.) The £1.25 million benefits taken is compared to the re-valued amount of the protected defined benefits/cash balance benefits for employer A on 5 April 2006 – the appropriate limit.

The appropriate limit is found to be £1.22 million. As the total benefit taken are more than the appropriate limit there has been relevant benefit accrual and Andrew loses enhanced protection.