RPSM03104600 - Technical Pages: Protecting pension rights from tax charges: Enhanced protection: Relevant benefit accrual: Example 1 of benefit increases that are not relevant benefit accruals

Example 1 of benefit increases after 5 April 2006 that are not relevant benefit accruals: low salary increases

The example here and on RPSM03104610 show where relevant benefit accrual as defined in paragraph 13, Schedule 36 FA 2004 has not occurred and consequently the individual has not lost enhanced protection.

Example 1: Accrual after 5 April 2006, but low salary increases

Anthony had 30 years service on 5 April 2006. The scheme’s accrual rate was 1/60th for each year of service. His final pensionable salary, as defined on that day in the scheme documentation, was £240,000. He therefore registered £2.4 million (£120,000 x 20) for enhanced protection.

Anthony remained an active member of the pension scheme for another five years until he reached normal retirement age. By this time, his final pensionable salary had grown to £252,000 giving a pension of £147,000 (35/60 x £252,000). The value of the benefit crystallisation event is £2.94 million (£147,000 x 20).

The test for relevant benefit accrual is whether the value of the benefit crystallisation event is greater than the value of the appropriate limit.

The appropriate limit is the greater of

• indexation of £2.4 million (x 5% compound, RPI or the percentage rate specified in The Registered Pension Schemes (Uprating Percentages for Defined Benefits Arrangements and Enhanced Protection) Regulations 2006 – SI 2006/130, and
• a recalculation of the pension accrued at 5 April 2006 reflecting current final pensionable salary and the scheme early retirement factor (where appropriate) for the current age and a valuation factor of 20.

For the purposes of this example it has been assumed that indexation at 5% compound gives a higher figure than the recalculation.

The value of the appropriate limit is £3,063,076 (£2.4 million indexed at 5%) which is more than the value of the benefit crystallisation event (£2.94 million). Therefore relevant benefit accrual has not occurred and enhanced protection is retained.