RPSM11104350 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension – BCE 3: The permitted margin

The permitted margin

Whether or not the permitted margin has been exceeded need be considered only if an increase to a scheme pension in payment exceeds the ‘threshold annual rate’. If the increase to the pension does not exceed the threshold annual rate there is no lifetimeallowance test through BCE 3. (See RPSM11104341 to RPSM11104346 for more details of the threshold annual rate).

If the threshold annual rate has been exceeded the way the permitted margin is calculated at the point of pension increase will vary depending on whether the initial entitlement to the scheme pension being increased arose on or after the 6 April 2006, or before that date.

The measure where the pension entitlement arose before the 6 April 2006 recognises the fact that the level of pension increases that the scheme in question actually provided at that time may have been greater than the post 6 April 2006 measure.

RPSM11104360 to RPSM11104380 outline how the permitted margin is calculated in the above two circumstances.

The permitted margin is not applied to an individual year in isolation. It is not simply comparing the level of scheme pension at the beginning of a 12 month period with the level at the end. The comparison is an ongoing measure from the point entitlement to the pension first arose. Staggered, one-off or uneven increases to a scheme pension in payment are catered for by giving credit for years where increases below the permitted margin measure were awarded by the scheme.

What the legislation is essentially saying is if the annual level of scheme pension at outset was increased year on year by a notional prescribed level of increase would the resulting level of pension be lower than the actual new level at the time of increase. If so then the increase beyond this measure triggers a BCE (BCE 3) and the capital value of the excess (XP) crystallises for lifetime allowance purposes. Credit for any amount crystallising is then given when measuring the permitted margin at future pension increases. For such future BCE 3s occurring on or after 10 October 2007, this credit can be uprated by 5% per year (or an agreed non-standard RVF) or RPI (see RPSM11104435).

RPSM11104420 explains how the excess (XP) is calculated, and both this page and RPSM11104390 gives an example of how the permitted margin test is applied over a period of years.