RPSM03104525 - Technical Pages: Protecting pension rights from tax charges: Enhanced protection: Relevant benefit accrual: Appropriate limit

Relevant benefit accrual in defined benefits and cash balance arrangements: the appropriate limit

[Para 15(4 – 11), 16 & 17 Sch 36] [Reg 3 The Registered Pension Schemes (Uprating Percentages for Defined Benefits Arrangements and Enhanced Protection) Regulations 2006 – SI 2006/130]

The ‘appropriate limit’ is the greater of two values

• the indexed amount
• the earnings recalculation amount.

Where an individual dies having registered for enhanced protection and a lump sum to benefit is paid the value of the ‘appropriate limit’ may need to be recalculated - see RPSM03109030.

The indexed amount

The value of the pension rights in the arrangement(s) on 5 April 2006, as valued by paragraphs 8 and 9 Schedule 36 Finance Act 2004 (see RPSM03101050) are increased by an indexation percentage to the date of the benefit crystallisation event or of the ‘permitted transfer’. The indexation percentage is the greatest of

• an annualised increase of 5% from 5 April 2006, or
• for contracted-out rights, rights subject to revaluation or preserved rights, an annualised increase at the percentage rate in regulation 3 of The Registered Pension Schemes (Uprating Percentages for Defined Benefits Arrangements and Enhanced Protection) Regulations 2006 – SI 2006/130, or
• the percentage increase in the Retail Price Index from April 2006 to the month in which the benefit crystallisation event or the permitted transfer occurs;

The total value of benefits crystallised/transfers made is compared to the indexed amount to see whether or not relevant benefit accrual has occurred.

The earnings recalculation amount

The value of the pension rights in the arrangement on 5 April 2006, as valued by paragraphs 8 and 9 Schedule 36 Finance Act 2004, uprated by ‘the earnings re-calculation value’. The value of the pension rights on 5 April 2006 is calculated using pensionable earnings up to that date. Under the earnings re-calculation value earnings paid after 5 April 2006 can be used to increase the value of pension rights on that date.

The earnings recalculation value is set at the point of the first benefit crystallisation event or permitted transfer to an other money purchase arrangement. RPSM03104530 to RPSM03104560 give more information on how the earnings recalculation works.