RPSM03302160 - Scheme Administrator Pages: Protecting pension rights from tax charges: Valuing lump sums: Scheme specific protection – rights more than MPP

Valuing scheme specific lump sum rights: example where the pension rights on 5 April 2006 exceed the maximum permitted pension

Lesley has pension and lump sum rights in two schemes for a sole employment on 5 April 2006. She has total pension rights of £200,000 and her lump sum rights are £44,000. Her rights are held in a single arrangement under each scheme. The £44,000 is less than her maximum permitted lump sum under HMRC limits but her maximum permitted pension under HMRC limits is valued at £160,000.

The position before adjustment was as follows

• Scheme A – pension rights of £80,000; lump sum £20,000; lump sum percentage 25%
• Scheme B – pension rights of £120,000; lump sum £24,000; lump sum percentage 20%

The reduction in Lesley’s pension rights from £200,000 to £160,000 must be apportioned between the two schemes.

In scheme A, the value of the pension rights is adjusted as follows, £80,000 – (£40,000 x£80,000/£200,000) which gives a figure of £64,000.

In scheme B, the value of the pension rights is adjusted as follows, £120,000 – (£40,000 x £120,000/£200,000 which gives a figure of £96,000.

After adjustment, Lesley’s lump sum percentages from the two schemes become

• Scheme A - pension rights of £64,000; lump sum £20,000; lump sum percentage 31.25%
• Scheme B - pension rights of £96,000; lump sum £24,000; lump sum percentage 25%

So after the required adjustment, the rights in Scheme A qualify for protection, as the lump sum percentage exceeds 25% of Lesley’s uncrystallised pension rights in that scheme.