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% is again applied on a compound basis (as with calculation A in RPSM11104370).

An example is given on RPSM11104410.