RPSM03105100 - Technical Pages: Protecting pension rights from tax charges: lump sums: Valuing lump sum rights: Lump sum retained benefits

The HMRC limits test: what are lump sum retained benefits and when must they be valued?

A retained benefit occurs in respect of a pensionable employment when there has been an earlier employment which generated pension rights in a retirement benefit scheme. The earlier employment may cease before the subsequent employment begins (in which case all of the rights from the earlier employment are retained benefits) or the two employments may overlap for some period (in which case only part of the rights from the earlier employment are retained benefits). Wholly concurrent employments (those which begin and end on the same dates) do not generate retained benefits with respect to each other. Further information on retained benefits can be found in the IR12, “Occupational Pension Schemes Practice Notes” see RPSM03110000 to RPSM03110250.

Retained benefits paid or payable as lump sums are significant for pre-1987 members because the maximum permitted lump sum payable in respect of an employment cannot exceed 3/80th lump sum of final remuneration (a measure of pensionable earnings) for each year of pensionable service, without taking account of the value of those retained benefits. In some circumstances the prospective lump sum rights payable for a current employment must be reduced because of the value of an individual’s retained benefits.

When calculating the maximum permitted lump sum for pre-1987 members, retained benefits may be ignored for any individual, including a controlling director, whose P60 earnings from a pensionable employment did not exceed £50,000 for the 2004/05 year of assessment. If the pensionable employment was not continuous for the whole of 2004/05 an annual rate for the P60 earnings must be calculated on a pro rata basis.

For individuals, including controlling directors, whose pensionable employment ceased before 6 April 2004, retained benefits may be ignored if their P60 earnings in the last complete year of assessment for the employment did not exceed £25,000, or if they qualified for the retained benefit disregard in Part 7 of IR12 “Occupational Pension Schemes Practice Notes”.

Retained benefits should always be ignored when calculating the maximum permitted lump sum for 1987 members and 1989 members.

The definition of pre-1987, 1987 and 1989 members is in Appendix I of the IR 12 “Occupational Pension Schemes Practice Notes” (2001).