RPSM03110060 - Technical Pages: Protecting pension rights from tax charges: Retained benefit practice before 6 April 2006: October 1989

October 1989 version

Retained benefits

6.26

Benefits accruing at a rate of N/60ths may usually be provided irrespective of the benefits the employee has earned during previous occupations (“retained benefits”). If, however, it is desired to give more than N/60ths, whether on “uplifted 60ths” scales or by reference to any other accrual rate higher than N/60ths, the benefits under the present employer’s schemes(s) (including benefits from any free-standing additional voluntary contributions schemes in respect of service with that employer) must be restricted so that when aggregated with the pension equivalent of the retained benefits, they will not exceed 2/3rds of the employee’s final remuneration.

Retained benefits include:-

1. pensions, whether deferred or already in payment, including any part of a deferred pension which is commutable, from any approved scheme and from any scheme accepted by the Inland Revenue as corresponding for the purposes of S.596(2)(b) ICTA 1988.
2. all pension benefits from free-standing additional voluntary contributions schemes relating to previous occupations,
3. the annuity equivalent of lump sums received or receivable, including any already received,
4. retirement annuities, before any commutation, under contracts and trust schemes approved under Chapter III Part XIV Income and Corporation Taxes Act 1988 (formerly section 226 Income and Corporation Taxes Act 1970) related to relevant earnings from the current or any earlier employment, or from previous periods of self- employment (either alone or in partnership) but excluding those in relation to a concurrent occupation.
5. annuities and the annuity equivalent of lump sums, from personal pension schemes approved under Chapter IV Part XIV Income and Corporation Taxes Act 1988 related to relevant earnings from the current or an earlier employment, or from previous periods of self-employment (either alone or in partnership) but excluding those in relation to a concurrent occupation. (Personal pension schemes approved under section 638(8)(a) Income and Corporation Taxes Act 1988 are not related to relevant earnings, and annuities from such schemes are not treated as retained benefits.),
6. annual payments made to a retired partner and treated as earned income under section 628 Income and Corporation Taxes Act 1988 (formerly section 16 Finance Act 1974), and
7. the annuity equivalent of amounts received by way of refunds of contributions and any interest thereon if they were received after the age of 45 and exceeded £2,000.

Benefits at a, b, c, d, e and f may be ignored if their annuity equivalent does not exceed £104 in all.

6.27

In practice, though they have an enhanced value by reason of earlier payment, pensions in payment may be taken at their actual amount and the annuity equivalent of lump sum benefits or refunds of contributions that have already been received may be taken as the amount of the immediate life annuity that could be bought at the relevant benefit commencement date under the current employer’s scheme with the actual amount of the lump sum.

Deferred pensions from previous occupations that will not come int0 payment until after the date of retirement from the current employment need not be brought into account as retained benefits until they begin to be paid. Alternatively, if level pensions from the current employer’s scheme are desired, the deferred pensions may be notionally reduced in the retained benefits calculation to their actuarial equivalent if paid at the earlier date.

6.28

20% directors (such a director being one who, either alone or together with his/her spouse and minor children, is or becomes the beneficial owner of shares which, when added to any shares held by the trustees of any settlement to which the director or his/her spouse had transferred assets, carry more than 20% of the voting rights of the company providing the pension or in a company which controls that company) and also former controlling directors as defined in section 224(1), Income and Corporation Taxes Act 1970, or section 624(3) Income and Corporation Taxes Act 1988, who have retained benefits as described in paragraph 6.26(d) and (e) and are later given benefits under an approved scheme may be required to take those retained benefits into account even though the scheme benefits do not exceed N/60ths of total service with the company; all such retained benefits must be taken into account, not merely those purchased during any period of back service in respect of which the scheme pension is paid, except where they relate to a concurrent occupation.