- Indexation of £2.4 million (x 5% compound, RPI or the percentage rate specified in The Registered Pension Schemes (Defined Benefit Arrangements – Uprated Opening Value) Regulations which to date has not been determined.
- A recalculation of the pension accrued at 5 April 2006 reflecting current final pensionable salary and the scheme early retirement factor (where appropriate) for the current age and a valuation factor of 20.
Enhanced protection needs enhanced clarity!
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Pension simplification is becoming widely regarded as anything but simple and this impression was not helped by the recent publication of technical pages in the Registered Pension Scheme Manual on the Inland Revenue website.
Up to this point the one thing that did appear simple was that in order for a member to benefit from enhanced protection of their pre 5th April 2006 pension entitlement they could not accrue any further benefits under any arrangement post this date. However, the guidance now provided would appear to allow continued membership of final salary schemes and cash balance arrangements with additional contributions and further benefit accrual allowable within certain limits.
The manual provides a flow chart and some worked examples looking at where continued accrual may be possible, such as where the member experiences low salary increases or where an early retirement reduction is applied.
Taking the low salary increase example the member had 30 years service at ‘A’ day based upon 1/60th accrual and a salary of £240,000. The member would therefore register £2.4 million (i.e. £120,000 pension at 20:1) for enhanced protection. The member remained in service for a further 5 years by which time salary had risen to £252,000 giving a pension of £147,000 (i.e. 35/60 x £252,000). The benefit crystallisation value would be £2.94 million.
The test for relevant benefit accrual is whether the value of the benefit crystallisation event is greater than the value of the appropriate limit which is defined as the greater of:-