RPSM03104531 - Technical Pages: Protecting pension rights from tax charges: Enhanced protection: Relevant benefit accrual: Earnings recalculation for defined benefits

How the earnings recalculation works for a defined benefits arrangement

For the earnings recalculation in a defined benefits arrangement the relevant pensionable earnings received after 5 April 2006 are used to calculate allowable benefits. Pensionable service to 5 April 2006 is used, as is the scheme accrual rate as it stood on 5 April 2006.

Pensionable service accrued after 5 April 2006 cannot be included in the calculation. Any change in the scheme accrual rate after 5 April 2006 is ignored. Any change in the scheme definition of pensionable salary after 5 April 2006 is ignored.

If the member takes benefits before or after their expected retirement date the amount of benefits is adjusted to take account of any reduction or increase required by the scheme rules as they were on 5 April 2006.

Example

On 5 April 2006 Robert has 29 years pensionable service and his benefits accrue at a rate of 1/60th of pensionable salary for each year of pensionable service. Robert’s pensionable salary is £150,000. So on 5 April 2006 Robert has protected accrued benefits of £1.45 million

29/60 x £150,000 = £72,500pa (x 20) = £1.45 million.

Six years later Robert first crystallises benefits. Robert’s pensionable earnings are now £225,000. This gives a pension worth

29/60 x £225,000 = £108,750pa

However Robert is retiring 2 years before his normal retirement date and the scheme rules require Robert’s pension to be reduced by 4% for each year it is paid early. The pension that Robert will receive will be reduced by 8% to account for the fact that it is being paid 2 years earlier than expected. So for the earnings recalculation Robert will receive benefits worth £2,001,000.

£108,750 – 8% = £100,050 x 20 = £2,001,000

Using the earnings recalculation the ‘appropriate limit’ is £2,001,000.

An arrangement may hold a transfer in on an ‘added years' basis where the pensionable service credited for the transfer has been calculated using uncapped earnings even though the individual's earnings are capped for current service. In these circumstances when making the earnings recalculation the number of ‘added years’ credited for the transfer in may be calculated using capped earnings.