RPSM11104410 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: Augmenting a scheme pension – BCE 3: Example of the permitted margin for pre 6 April 2006 pensions

Example of the calculation of the permitted margin where entitlement to the scheme pension arose before 6 April 2006

Marilyn became entitled to a pension from an occupational pension scheme on 1 April 2004 starting at £10,000 per annum. Marilyn’s maximum pension under HMRC rules was £20,000 per annum.

On 5 April 2006 Marilyn is entitled under the scheme rules to a rate of increase of 6% per annum.

The scheme becomes a registered pension scheme on 6 April 2006, with the ongoing pension becoming a scheme pension.

In March 2007 Marilyn’s pension is being increased.

The maximum permitted margin Marilyn’s pension can be raised to is the higher of two measures:

• The margin reached if her starting entitlement of £10,000 per annum on 1 April 2004 had been increased by the higher of 5% per annum compound or by RPI to March 2007, or
• The margin reached if the £10,000 pension had been increased from 1 April 2004 by 6% per annum compound up until March 2007.

With both measures the revaluation is over the period from April 2004 to March 2007 (36 months, counting the first and last month as a complete month).

Under the first measure the permitted margin comes out as calculation A (which is higher than the RPI measure through calculation B). If the £10,000 starting entitlement is increased by 5% per annum compound over the 36 month period Marilyn’s pension would be increased to £11,576 per annum. £11,576 per annum is therefore the permitted margin Marilyn’s pension could be increased by to under the first measure.

Under the second measure the permitted margin is calculated by the same process as through calculation A above, but by reference to an annual percentage increase of 6%, as specified in the scheme rules on 5 April 2006 (P%). If the £10,000 starting entitlement is increased by 6% per annum compound over the 36 month period Marilyn’s pension would be increased to £11,910 per annum. As this is below the HMRC maximum that applied on 1 April 2004, £11,910 per annum is therefore the permitted margin Marilyn’s pension could be increased by to under the second measure.

If Marilyn’s scheme pension is increased beyond £11,910 in March 2007 the excess (XP) crystallises for lifetime allowance purposes through BCE 3.