RPSM03104532 - Technical Pages: Protecting pension rights from tax charges: Enhanced protection: Relevant benefit accrual: Earnings recalculation for cash balance benefits

How the earnings recalculation works for a cash balance arrangement

For a cash balance arrangement the pensionable earnings received after 5 April 2006 are used to determine a revised capital value. The capital value is then adjusted to allow for any reduction or increase required by the scheme rules if the benefits are taken either before or after the member’s normal retirement date.

Example

Henry is a member of a cash balance arrangement where he is promised that an amount of 20% of his final pensionable salary for each year of pensionable service will be made available to provide benefits. On 5 April 2006 Henry 59 has accrued 30 years of pensionable service and his pensionable salary is £250,000. His benefits rights on 5 April 2006 are therefore £1.5 million (£250,000 x 20% x 30).

Five years later Henry now aged 64 takes benefits. His normal retirement age (NRA) under the scheme is 60. He took no benefits at age 60 and stayed in service. Having reached age 60 the scheme, the scheme rules award actuarial increases to benefits deferred past NRA. (The scheme calculates the value of benefits at age 60 using Henry’s pensionable salary at that point and then actuarially increases the benefits for the period age 60 to 64.) The actuarial increase calculated with respect to the scheme rules on 5 April 2006 increases the value of the deferred benefits to £2 million. This will be the appropriate limit using the earnings recalculation.

Where the benefits promised under a cash balance arrangement are not dependent on earnings the earnings recalculation will have no effect. The appropriate limit will be the indexed amount (see RPSM03104525).

Example

The benefit promised under Angela’s cash balance arrangement is that she will have £40,000 made available for the first 10 years pensionable service and £60,000 for each year of pensionable service thereafter. On 5 April 2006 Angela has completed 25 years pensionable service. Her rights at this point are that £1.3 million will be made available to provide pension benefits. It does not matter how much Angela earns; it will have no effect on the amount that will be made available to provide benefits.