RPSM03110040 - Technical Pages: Protecting pension rights from tax charges: Retained benefit practice before 6 April 2006: May 1979 pension

IR 12 Practice Notes May 1979 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 the “uplifted 60ths” scale or by reference to any other accrual rate higher than N/60ths, the benefits under the present employer’s scheme(s) must be restricted so that when aggregated with the pension equivalent of the retained benefits, they will not exceed two-thirds 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, and whether from a United Kingdom or any overseas source, but not including any pension from any State scheme,
   
   
2. the annuity equivalent of lump sums received or receivable, including any already received in commutation of pension,
   
   
3. retirement annuities under contracts and trust schemes (approved under section 226, Income and Corporation Taxes Act 1970) related to non-pensionable service with the current or an earlier employer, or to previous periods of self-employment (either alone or in partnership), but excluding those relating to a concurrent occupation,
   
   
4. annual payments made to a retired partner and treated as earned income (“partnership retirement annuities – section 16 Finance Act 1974) and
   
   
5. the annuity equivalent of amount received by way of refund of contributions and any interest thereon if they were received after the age of 45 and exceeded £2,000.

Benefits at a, b, c and d may be ignored if their annuity equivalent does not exceed £52 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 into 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, who have paid premiums under retirement annuity contracts during non-pensionable service and are later given benefits under an approved scheme may be required to take the benefits under the retirement annuity contracts into account even though the scheme benefits do not exceed N/60ths for total service with the company; all retirement annuities 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