RPSM11104400 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension – BCE 3: Permitted margin for pensions first paid before 6 April 2006

The permitted margin where entitlement to the scheme pension arose before 6 April 2006

If the pension entitlement arose before 6 April 2006 the permitted margin is the greater of

• a level as calculated in the same way as detailed in RPSM11104370 and RPSM11104380, based on calculation A and B, but applied with effect from the date the entitlement to that pension first arose before 6 April 2006, and
• the amount by which the annual rate of pension would be greater at the point of calculation if that starting entitlement before 6 April 2006 had been increased, year on year, up to that point by the rate of increase specified in the scheme rules as they stood on 5 April 2006. This is referred to in the legislation as ‘P%’.

Protection is given to individuals who are entitled to a higher rate of pension increase than that provided through calculation A or B under a scheme in existence at 5 April 2006.

If the rate of annual pension increase specified at 5 April 2006 is no greater than a 5% or RPI rate the permitted margin will be the first measure above (so as if the entitlement had arisen after 6 April 2006, albeit calculation A and B is applied to a starting point before that date).

The measure of P% on 5 April 2006 is subject to HMRC rules in force at that time. So the permitted margin, as calculated through P%, can never breach the maximum pension permitted through HMRC rules at the time of retirement, re-valued each year by the greater of 3% or RPI (the pre 6 April 2006 cap on increases in pensions in payment).

P%, where measured as a year-on-year increase, is again applied on a compound basis (as with calculation A in RPSM11104370). But P% does not need to relate to a year-on-year percentage increase. Rather, the expression of a percentage exists as a common form of comparison with the other forms of increase. We are prepared therefore to accept that increases to a scheme pension which began before 6 April 2006 which may be accepted as falling within P% include the following 3 bulleted items. This applies whether the increases are made before, on or after 6 April 2006, but is dependent on the increases being permitted within the scheme’s provisions as at 5 April 2006:

• an increase to reflect an adjustment to the level of pension in recognition of the revaluation of contracted-out rights, i.e. to a guaranteed minimum pension (GMP).
• an increase awarded by use of the discretion of the scheme administrator/trustees where such an increase is demonstrably in keeping with the power permitted within the scheme provisions.
• an increase which relates to an element of a pension, for example, a contracted- out element, which does not relate to another element, or where both elements are increased but at different rates.

All the above increases would be subject to the scheme provisions which limited the scheme pension to the pre A Day HMRC benefit limits. But where a pension was paid at the maximum level, or reached such a level following pension increases, it is likely that it could be further increased at the greater of 3% per year or the increase in the RPI. Increases, even where made after 5 April 2006, which do not produce a pension level above the maximum plus 3%/RPI may be accepted as being within P%.

In summary, if it can be established that an increase to a scheme pension which started before 6 April 2006 would have been permitted within the scheme provisions as they stood at 5 April 2006, it may be regarded as being within P%. It would follow that such an increase would fall within the permitted margin, and does not give rise to a BCE3.

An example is given on RPSM11104410.