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HMRC internal manual

Pensions Tax Manual

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Protection from the lifetime allowance charge: fixed protection, fixed protection 2014 and fixed protection 2016: testing for benefit accrual

Glossary PTM000001
   

Due to the similarities in the principles of these three types of protection this guidance covers them all unless otherwise specified and the three types of fixed protection are referred to collectively on this page as “the fixed protection(s)”.

Responsibility
When to test for benefit accrual
Benefit accrual is an ongoing test
The benefit accrual test for defined benefits is a test on prospective rights
When not all benefits are taken from an arrangement
Enhancements on taking benefits
Death benefits including death in service benefits
Examples of testing for benefit accrual under a defined benefits or cash balance arrangement for fixed protection (FP 2012)
Examples of testing for benefit accrual under a defined benefits or cash balance arrangement for fixed protection 2014 (FP 2014)

Fixed Protection (FP 2012) - Paragraph 14 Schedule 18 Finance Act 2011

Fixed Protection 2014 (FP 2014) - Paragraph 1(3) Schedule 22 Finance Act 2013

Fixed Protection 2016 (FP 2016) - Paragraph 4 Schedule 4 Finance Act 2016

Responsibility

The member is responsible for testing for benefit accrual because they have made a signed the declaration to this effect when they applied for their fixed protection. However, a member may need to ask their pension scheme administrator for information to help them carry out the test.

When to test for benefit accrual

For an other (i.e. non-cash balance) money purchase arrangement the test is whether or not there have been any relevant contributions made. The test is therefore carried out at the time any contribution is made. If no relevant contributions are made to the arrangement then the member will not lose their fixed protection.

For a defined benefits or cash balance arrangement, benefit accrual can occur at any time during the tax year. If an individual remains as an active member of their scheme this may mean that they will need to carry out the test more frequently than a deferred member.

Where a member is a deferred member of their scheme then their deferred rights may be increased by a rate of increase specified in their pension scheme’s rules and if this rate was in the scheme rules at 9 December 2010 for FP 2012, 11 December 2012 for FP 2014 or 9 December 2015 for FP 2016 then this, plus any relevant statutory increase percentage that may also apply to the member’s pension rights, will then be the relevant percentage.

This means that a deferred member should be able to predict the increase in their benefits in the tax year and should be able to tell from the outset whether the increase in their benefits will exceed that produced by applying the relevant percentage. In effect so long as a scheme does not, after the date mentioned above that applies to the individual’s protection, amend their rules to provide for a higher annual rate of increase for deferred benefits then an individual who only has deferred rights should keep their fixed protection.

For active members of a scheme this is less predictable - for example, their increase in benefits may also depend on their increased service and any increase in salary.

The test for benefit accrual should be carried out at least after the end of every tax year. Where there has been benefit accrual the fixed protection will be lost at the time the benefit accrual occurred which may not be the time the test is done. If the individual wishes to remain an active member then they will need to be aware that more frequent tests may be necessary. Penalties will apply where the member does not tell HMRC that they have lost their fixed protection within 90 days of benefit accrual.

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Benefit accrual is an ongoing test

The benefit accrual test for the fixed protections is a forward looking test that begins immediately after midnight on 5th April each year. If the pension and lump sum rights of a member with any of the fixed protections are increased by an amount which exceeds the relevant percentage at any time during a tax year, the member will lose their fixed protection at the point in time when the relevant percentage was exceeded, irrespective of what happens subsequently during the tax year. The relevant percentage will be the rate specified in the scheme rules on 9 December 2010 for FP, 11 December 2012 FP 2014 or 9 December 2015 for FP 2016 by which a member’s rights are increased annually plus the relevant statutory increase percentage.

Where there is no such rate, for FP 2012 the relevant percentage will be an annual increase arrived at by reference to and not exceeding an annual increase in the RPI plus the relevant statutory increase percentage. Where the member has more than one arrangement in a scheme providing RPI related percentages the highest of these counts. Such an RPI increase is only a relevant percentage if the scheme rules made provision for it on 6 April 2012.

If neither of the above set of circumstances apply in a member’s case, the relevant percentage is the higher of the annual rate of increase in the Consumer Prices Index (CPI) for the year ending with the previous September’s CPI and the relevant statutory increase percentage.

See PTM093600 for more detail about the relevant percentage.

So at the start of any tax year a member will be able to find out the relevant percentage applying to them because it is either specified in the scheme’s rules or has already been published, in the case of the annual increase in the CPI and relevant statutory increases.

This will allow them to work out by how much their pension and lump sum rights can increase during the tax year before they lose their fixed protection. It is important to note that for the tax year 2016-17, the annual increase in the CPI for that year is 0% so, where the relevant percentage in a particular case is the annual rate of increase in the CPI, if there is any increase in the individual’s pension and lump sum rights during tax year 2016-17 their fixed protection is lost.

It is for the member to decide on the frequency of the actual test during the tax year based on their own circumstances, bearing in mind they have an obligation to notify HMRC when they have lost their fixed protection, with possible penalties for not doing so.

When carrying out a benefit accrual test during a tax year, the relevant percentage to be used is always by reference to the annual rate, rather than a proportion of it.

This also applies where the member takes all of their benefits under the defined benefits arrangement part way through the year.

At the time all the benefits are taken, providing those rights have not increased by the relevant percentage for the tax year, the member won’t have benefit accrual in respect of that particular arrangement unless they start accruing new rights under the arrangement.

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The benefit accrual test for defined benefits is a test on prospective rights

The fixed protection is lost if at any time in a tax year the value of the member’s pension and lump sum rights (calculated using the valuation assumptions set out in section 277 of Finance Act 2004) is increased by an amount which exceeds the relevant percentage (see above).

The benefit accrual test is, by virtue of the words ‘at any time’ in the relevant legislation, an ongoing test as explained above.

The valuation assumptions are:

  • the benefits to be valued are those which would be paid if the member had reached the age at which no actuarial reduction would apply on account of age, and
  • the member has not retired on incapacity grounds.

This means that the rights are to be valued on a prospective basis and therefore the test applies to prospective rights only.

Benefit accrual can therefore only occur where the member’s benefits have not come into payment.

In view of the above it follows that the value of pension and lump sum used for the purpose of all three fixed protections will be the same as the value of pension and lump sum used for determining the closing value of the annual allowance pension input amount, for a pension input period ending on the date the benefit accrual test is carried out.

The value of the actual benefits taken is not subject to a benefit accrual test as the pension and lump sum rights are, at that stage, actual rather than prospective rights. If benefit accrual occurs in relation to a member’s prospective rights then they have lost their fixed protection. The fact that their actual benefits are later actuarially reduced and so have a lower value than they did as prospective rights does not change the position.

For the same reason, increases to a pension in payment do not give rise to benefit accrual even if that increase gives rise to a benefit crystallisation event (BCE) 3. See PTM088630 for more details on BCE 3. This includes cases where a pensioner member accepts an immediate one-off increase in their pension in exchange for foregoing their right to future non-statutory pension increases.

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When not all benefits are taken from an arrangement

Where a member takes some but not all, of their benefits under an arrangement during a tax year, HMRC’s view is that this does not give an opportunity to accrue further benefits over and above the relevant percentage increase without benefit accrual occurring.

If the member is an active member continuing to accrue benefits in the arrangement then they can only accrue benefits up to the relevant percentage before benefit accrual occurs triggering the loss of the fixed protection.

When some, but not all benefits are taken the prospective rights immediately before crystallisation should be valued to see if benefit accrual has occurred (assuming benefit accrual has not exceeded the relevant percentage at any earlier stage in the tax year so that the fixed protection has already been lost).

For FP 2012, if at that stage any benefit accrual is within the relevant percentage then FP 2012 is not lost and the underpinning lifetime allowance of £1.8 million (or the standard lifetime allowance if this is higher) applies in relation to the benefits taken.

For FP 2014, if at that stage any benefit accrual is within the relevant percentage then FP 2014 is not lost and the underpinned lifetime allowance of £1.5 million (or the standard lifetime allowance if this is higher) applies in relation to the benefits taken.

For FP 2016, if at that stage any benefit accrual is within the relevant percentage then FP 2016 is not lost and the underpinned lifetime allowance of £1.25 million (or the standard lifetime allowance if this is higher) applies in relation to the benefits taken.

The ongoing test for benefit accrual when some, but not all, benefits have been taken then applies by reference to the residual benefits.

If the member continues to accrue benefits in the arrangement from the uncrystallised funds then they can only accrue benefits for those funds up to the relevant percentage, taking account of any increase that accrued before part crystallisation.

Example

On 6 April 2014 Fiona has uncrystallised defined benefits pension rights of £72,500 (pension before commutation); the value of her uncrystallised rights is £1.45million (£72,500 x 20).

Fiona has FP 2014.

Fiona remains in active membership of the scheme and in her case the “relevant percentage” for tax year 2014-15 is the annual increase in the CPI for September 2013 which is 3 per cent.

Fiona is therefore aware that if her rights increase by more than 3 per cent she will lose her FP 2014. £1.45million increased by 3 per cent is £1,493,500.

On 30 October 2014, Fiona takes a pension of £50,000 from her arrangement. By that time her total accrued rights were to a pension of £74,000.

The value of her prospective rights immediately before crystallisation is therefore £1.48million (£74,000 x 20). This is an increase of about 2.1 per cent.

There has been no increase in Fiona’s rights above the relevant percentage so she has not lost FP 2014.

However, the £24,000 remaining uncrystallised pension rights have already received a nearly 2.1 per cent increase (in effect the uncrystallised rights were worth about £23,506 at the start of the year and have increased by about 2.1 per cent to £24,000).

The uncrystallised rights may still give rise to benefit accrual if they are increased beyond the relevant percentage during the tax year. In measuring this it is necessary to take account of all increases during the tax year including those increases previously occurring before part crystallisation.

Any further increase in the value of those remaining uncrystallised rights in 2014-15, in excess of 0.9 per cent of £23,506, will therefore lead to loss of FP 2014.

Similarly, if Fiona’s rights had been increased by 3 per cent by the time the pension of £50,000 was taken, she loses her FP 2014 if the remaining uncrystallised rights are increased at all during the remainder of the tax year.

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Enhancements on taking benefits

An enhancement of benefits on incapacity grounds will not in itself lead to benefit accrual (and potential loss of the fixed protection) in the year when those enhanced defined benefits come into payment.

Since the benefit accrual test is in relation to the value of the member’s prospective rights immediately before the benefits are taken rather than against the value of the benefits themselves, applying the valuation assumptions means that the member is assumed to take their benefits when they are in good health.

No account is taken of any incapacity enhancement when calculating the value of prospective rights for benefit accrual purposes.

However, other enhancements (such as enhanced benefits on redundancy or a one-off increase in pension rights in exchange for the individual foregoing the right to future non-statutory pension increases) awarded before benefits are taken may trigger benefit accrual.

The member will normally have acquired a prospective right to the enhanced benefits at some point in time before they come into payment. This means there is an increase in the individual’s prospective rights.

As the benefit accrual test is an ongoing one it applies to any increase in rights right up to the moment benefits are taken. If the increase exceeds the relevant percentage then the fixed protection will be lost.

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Death benefits including death in service benefits

The rules for the treatment of death benefits for the purposes of any of the fixed protections and the annual allowance charge are different.

For the fixed protections, the continuing provision of defined benefit death benefits (whether under the same arrangement/registered pension scheme or under a separate arrangement/ registered pension scheme as that under which the member’s own benefits are being provided) cannot give rise to benefit accrual.

This is because death benefits are outside the definition of ‘the benefits amount’ and consequently the benefit accrual test in the legislation.

As the ‘benefits amount’ definition restricts the benefits amount to the member’s own pension and lump sum rights under the scheme, the fixed protection cannot be lost as a result of an increase in a member’s defined benefit death benefits.

If death benefits are provided under a separate arrangement that is a hybrid arrangement where, until death occurs, there is the possibility of the death benefit being provided as either a defined benefit or an other (i.e. non-cash balance) money purchase benefit, the benefit accrual tests for both defined benefits and other money purchase arrangements need to be carried out.

As a result, although there is no possibility of benefit accrual under the defined benefits test, any relevant contributions (including life insurance premiums) made to the arrangement after 5 April 2012 for FP 2012, or 5 April 2014 for FP 2014 or 5 April 2016 for FP 2016 will lead to loss of protection.

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Examples of testing for benefit accrual under a defined benefits or cash balance arrangement for FP 2012

Note 1: For the purpose of these examples it is assumed that the member is not entitled to a relevant statutory increase in addition to the increase they receive under the rules of their pension scheme.

Note 2: For tax year 2016-17, the annual increase in the CPI for that year is 0% so, where the relevant percentage in a particular case is the annual rate of increase in the CPI, if there is any increase in the individual’s pension and lump sum rights during tax year 2016-17 their protection is lost. So these examples are not relevant after 5 April 2016.

Example 1

Sarah is a member of a defined benefits scheme. Sarah successfully applied for FP 2012 on March 2012. She also tells her scheme that she wants to stop accruing pension benefits.

Under the rules of Sarah’s pension scheme it is specified that:

  • she will still get a ‘death in service’ benefit of a lump sum of four times salary and a dependant’s pension, and
  • her deferred pension is increased by 5 per cent pa. This rule has been in place since before 9 December 2010.

As the ‘death in service’ benefit and the dependant’s pension are not part of Sarah’s pension rights for the purposes of benefit accrual, any increase in the value of these benefits will not cause her to lose fixed protection even though the lump sum death benefit will be tested against the lifetime allowance if Sarah died before reaching age 75.

As Sarah’s pension is only being increased in line with an annual rate specified in the scheme rules she will not lose fixed protection. So there is no need to test for benefit accrual in respect of her deferred pension during any tax year in which this is the only increase that applies to it.

Example 2

Roger is a member of a defined benefits scheme. His scheme gives him a pension of 1/60th of pensionable salary for each year of service. To get a lump sum Roger has to give up (commute) part of his pension. If Roger dies before he starts drawing his pension a lump sum of four times salary will be paid.

Roger successfully applied for FP 2012 but continues to build up benefits under his scheme after 5 April 2012. From 2012-13 onwards Roger needs to check at regular intervals during each tax year to see if he has lost FP 2012. He does this by testing whether or not the value of his pension rights have gone up by more than the “relevant percentage” at any point in time during the tax year. The relevant percentage, is either

an annual rate specified in the rules of the pension scheme on 9 December 2010, or where there is no rate specified

the annual percentage increase in the Consumer Prices Index (CPI) for the month of September in the previous tax year.

The rules of Roger’s pension scheme do not set a percentage by which member’s benefits are increased each year. So Roger needs to check that his pension rights have not gone up by more than the annual CPI increase.

On 5 April 2012 Roger has 35 years of service and a pensionable salary of £132,000. He has built up a pension of

35/60 x £132,000 = £77,000pa.

The value of Roger’s pension rights on 5 April 2012 is therefore

£77,000 x 20 = £1,540,000.

On 5 April 2013 Roger’s pensionable salary has gone up by £4,000 to £136,000. Roger has now built up an annual pension of

36/60 x £136,000 = £81,600.

This means the value of his pension rights is now

£81,600 x 20 = £1,632,000

The annual increase in CPI to September 2011 is, 5.2 per cent. This means that as long as the value of Roger’s pension rights in the tax year has not increased by more than 5.2 per cent he will keep FP 2012.

The value of Roger’s pension rights as at 5 April 2012 increased by CPI is

£1,540,000 x 105.2/100 = £1,620,080.

This is less than the value of Roger’s pension rights at the end of 2012-13. As the CPI increase that is the relevant percentage is published in the previous October, this value can be calculated at the beginning of the tax year. So this figure is known before 6 April 2012. Roger loses FP 2012 at the point in time during the tax year that the value of his pension rights exceeded £1,620,080.

Example 3

Rosa is a member of a defined benefits scheme. Her scheme gives her a pension of 1/60th of pensionable salary for each year of service. To get a lump sum Rosa has to give up (commute) part of her pension. If Rosa dies before she starts drawing her pension a lump sum of four times salary will be paid.

Rosa successfully applied for FP 2012 and agrees with her scheme to have no further accrual of pensionable service but her benefits will continue to be linked to her salary. From 2012-13 onwards Rosa will need to check at regular intervals during each tax year to see if she has lost FP 2012. She does this by testing whether or not the value of her pension rights has gone up by more than the ‘relevant percentage’ at any point in time during the tax year. The relevant percentage, is either

an annual rate specified in the rules of the pension scheme that was specified there on 9 December 2010, or where there is no such rate

the annual percentage increase in the CPI for the month of September in the previous tax year.

The rules of Rosa’s pension scheme do not set a percentage by which member’s benefits are increased each year while they are an employed member. So Rosa needs to check that her pension rights have not gone up by more than the annual CPI increase.

On 5 April 2012 Rosa has 35 years of service and a pensionable salary of £132,000. She has built up a pension of

35/60 x £132,000 = £77,000pa.

The value of Rosa’s pension rights on 5 April 2012 is therefore

£77,000 x 20 = £1,540,000.

On 5 April 2013 Rosa’s pensionable salary has gone up by only £500 to £132,500. Rosa has now built up an annual pension of

35/60 x £132,500 = £77,292.

This means the value of her pension rights is now

£77,292 x 20 = £1,545,833

The annual increase in the CPI to September 2011 is 5.2 per cent. This means that as long as Rosa’s pension rights in the tax year have not increased by more than 5.2per cent she will keep FP 2012.

The value of Rosa’s pension rights as at 5 April 2012 increased by CPI would be

£1,540,000 x 105.2/100 = £1,620,080.

This is more than the value of Rosa’s pension rights at the end of 2012-13. As the CPI increase that is the relevant percentage is published in the previous October, this value can be calculated at the beginning of the tax year. So this figure is known before 6 April 2012. Rosa has not lost FP 2012 and if her rate of salary increase is also known in advance it may not have been necessary for her to carry out any further benefit accrual test during the year once she has calculated that the increase will not result in benefit accrual.

Note: If Rosa continues to receive annual pension increases in line with her salary increase each year, if she has not already done so she will certainly lose her protection in tax year 2016-17 as the CPI increase applying for the purposes of the relevant percentage for that year is 0%.  So, if Rosa receives a salary increase in that year, she will lose her protection from the date the increase takes effect.

Example 4

Angela is a member of a defined benefits scheme. Angela’s pension builds up at a rate of 1/80th of pensionable salary for each year of service. Her scheme also gives Angela a separate lump sum of three times her pension. If Angela dies before she starts drawing her pension a lump sum of four times her salary will be paid.

Angela successfully applied for FP 2012 and continues to build up benefits after 5 April 2012.

From 2012-13 onwards Angela needs to check at regular intervals during each tax year to see if she has lost FP 2012 at any point in time during the tax year. She does this by testing whether or not the value of her pension rights have gone up by more than the “relevant percentage” for the tax year. The relevant percentage, is either:

  • an annual rate specified in the rules of the pension scheme on 9 December 2010, or where there is no rate specified
  • the annual percentage increase in the consumer prices index (CPI) for the month of September in the previous tax year.

The rules of Angela’s pension scheme do not set a percentage by which member’s benefits are increased each year. So Angela needs to check that her pension rights have not gone up by more than the annual CPI increase.

On 5 April 2012 Angela has 35 years of service and a pensionable salary of £132,000. She has built up a pension of

35/80 x £132,000 = £57,750 pa, and a lump sum of

3 x £57,750 pa = £173,250

The value of Angela’s pension rights on 5 April 2012 is therefore

(£57,750 x 20) + £173,250= £1,328,250.

The annual increase in CPI to September 2011 is 5.2 per cent. This means that to keep FP 2012 Angela’s pension rights on 5 April 2013 cannot be more than

£1,328,250 x 105.2/100 = £1,397,319.

At 5 April 2013 Angela’s pensionable salary has increased to £136,000. Her annual pension on 5 April 2013 is

36/80 x £136,000 = £61,200.

Angela has also built up a lump sum of

3 x £61,200 = £183,600

This means the value of Angela’s pension rights at 5 April 2013 is

(£61,200 x 20) + £183,600 = £1,407,600.

During the 2012-13 tax year Angela’s pension rights have increased by more than the CPI increase. Angela has lost FP 2012 from the date on which the value of her benefits exceeded £1,397,319.

Example 5

Emily is a member of a defined benefits scheme. Under the scheme the formula for the pension due to her when she reached the scheme’s normal retirement age is 1/80th x pensionable salary x years and complete months of service. There are no lump sum retirement benefits as of right, only by commutation.

Emily successfully applied for FP 2012 and continues to build up benefits as an active member after 5 April 2012.

On 5 April 2013 Emily has accrued a pension of £37,950 pa; with a value, for FP 2012 purposes, of £759,000 (i.e. 20 x £37,950).

The annual increase in CPI to September 2012 is, say, 3 per cent.

This means that to keep FP 2012 until (at least) 5 April 2014 Emily’s pension rights cannot at any time from 6 April 2013 to 5 April 2014 be more than £759,000 x 103/100 = £781,770 (equivalent to a pension of £39,088 pa).

Again, Emily knows that her pensionable salary will be fixed over 2013/14. At 5 April 2014 her pensionable salary will therefore still be £132,000. If she continues in pensionable service, then her annual pension on 5 April 2014 would be 24/80 x £132,000 = £39,600, with a value for FP 2012 purposes of (£39,600 x 20) = £792,000.

This is more than £781,770. So Emily knows that if she continues in pensionable service to the end of the tax year, she will at some point before then lose FP 2012.

The scheme accounts for pensionable service in completed months of service. As Emily joined service on 28 March 1990 then, if she leaves between 28 November and 27 December inclusive she will have a prospective pension of £39,050 pa (23 8/12 / 80 x £132,000); and if she leaves on 28 December she will have accrued an further month’s service giving her a prospective pension of £39,188 pa (23 9/12 / 80 x £132,000).

So Emily will lose FP 2012 if she is still in pensionable service on 28 December 2013 when she had a prospective pension of £39,188, which has a value of £783,760. Her FP 2012 will be lost on 28 December 2013.

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Examples of testing for benefit accrual under a defined benefits or cash balance arrangement for FP2014

Note 1: For the purpose of these examples it is assumed that the member is not entitled to a relevant statutory increase in addition to the increase they receive under the rules of their pension scheme.

Note 2: For tax year 2016-17, the annual increase in the CPI for that year is 0% so, where the relevant percentage in a particular case is the annual rate of increase in the CPI, if there is any increase in the individual’s pension and lump sum rights during tax year 2016-17 their protection is lost. So these examples are not relevant after 5 April 2016.

Example 1

Sarah is a member of a defined benefits scheme. Sarah successfully applied for FP 2014. She also tells her scheme that she wants to stop accruing pension benefits.

Under the rules of Sarah’s pension scheme it is specified that:

  • she will still get a ‘death in service’ benefit of a lump sum of four times salary and a dependant’s pension, and
  • her deferred pension is increased by 5 per cent pa. This rule has been in place since before 11 December 2012.

As the ‘death in service’ benefit and the dependant’s pension are not part of Sarah’s pension rights for the purposes of benefit accrual, any increase in the value of these benefits will not cause her to lose FP 2014 even though the lump sum death benefit will be tested against the lifetime allowance if Sarah died before reaching age 75.

As Sarah’s pension is only being increased in line with an annual rate specified in the scheme rules on 11 December 2012 she will not lose FP 2014. Any additional increase that is a relevant statutory increase percentage can also be ignored. So there is no need to test for benefit accrual in respect of her deferred pension during any tax year in which this is the only increase that applies to it.

Example 2

Roger is a member of a defined benefits scheme. His scheme gives him a pension of 1/60th of pensionable salary for each year of service. To get a lump sum Roger has to give up (commute) part of his pension. If Roger dies before he starts drawing his pension a lump sum of four times salary will be paid.

Roger has successfully applied for FP 2014 but continues to build up benefits under his scheme after 5 April 2014. From 2014-15 onwards Roger needs to check at regular intervals during each tax year to see if he has lost FP 2014. He does this by testing whether or not the value of his pension rights have gone up by more than the ‘relevant percentage’ at any point in time during the tax year. The relevant percentage, is either:

  • an annual rate specified in the rules of the pension scheme on 11 December 2012, or where there is no rate specified
  • the annual percentage increase in the Consumer Prices Index (CPI) for the month of September in the previous tax year.

The rules of Roger’s pension scheme do not set a percentage by which member’s benefits are increased each year. So Roger needs to check that his pension rights have not gone up by more than the annual CPI increase.

On 5 April 2014 Roger has 35 years of service and a pensionable salary of £120,000. He has built up a pension of

35/60 x £120,000 = £70,000pa.

The value of Roger’s pension rights on 5 April 2014 is therefore

£77,000 x 20 = £1.4 million

On 5 April 2015 Roger’s pensionable salary has not increased as his employer is operating a pay freeze. Roger has now built up an annual pension of

36/60 x £120,000 = £72,000.

This means the value of his pension rights is now

£72,000 x 20 = £1,440,000.

The annual increase in CPI to September 2013 is, say, 3 per cent. This means that as long as the value of Roger’s pension rights in the tax year 2014-15 has not increased by more than 3 per cent he will keep FP 2014.

The value of Roger’s £1.4 million pension rights as at 5 April 2014 increased by the 3 per cent increase in CPI is

£1.4 million x 103/100 = £1,442,000.

This is £2,000 more than the value of Roger’s pension rights at the end of 2013-14. As the CPI increase that is the relevant percentage is published in the previous October, this value (£1,442,000) can be calculated at the beginning of the tax year. So this figure is known before 6 April 2014. Roger does not lose FP 2014 at the point during the tax year and he will know this in advance (assuming the pay freeze was announced before 6 April 2014).

Note: if Roger continues to accrue benefits under his scheme, if he has not already done so he will certainly lose his protection in tax year 2016-17 as the CPI increase applying for the purposes of the relevant percentage for that year is 0%.  Roger will lose his fixed protection from the first day in the tax year that his pension rights increase (probably 6 April 2016).

Example 3

Rosa is a member of a defined benefits scheme. Her scheme gives her a pension of 1/60th of pensionable salary for each year of service. To get a lump sum Rosa has to give up (commute) part of her pension. If Rosa dies before she starts drawing her pension a lump sum of four times salary will be paid.

Rosa has successfully applied for FP 2014 and agrees with her scheme to have no further accrual of pensionable service but her benefits will continue to be linked to her salary. From 2014-15 onwards Rosa will need to check at regular intervals during each tax year to see if she has lost FP 2014. She does this by testing whether or not the value of her pension rights has gone up by more than the ’relevant percentage’ at any point in time during the tax year. The relevant percentage, is either:

  • an annual rate specified in the rules of the pension scheme that was specified there on 11 December 2012 plus any relevant statutory increase percentage, or where there is no such rate specified
  • the higher of the annual percentage increase in the CPI for the month of September in the previous tax year and any relevant statutory increase percentage.

The rules of Rosa’s pension scheme do not set a percentage by which member’s benefits are increased each year while they are an employed member. Instead increases are based on salary increases. So Rosa needs to check that her pension rights have not gone up by more than the annual CPI increase/relevant statutory increase (whichever is the higher).

On 5 April 2014 Rosa has 35 years of service and a pensionable salary of £120,000. She has built up a pension of

35/60 x £120,000 = £70,000pa.

The value of Rosa’s pension rights on 5 April 2014 is therefore

£70,000 x 20 = £1.4 million.

On 5 April 2015 Rosa’s pensionable salary has gone up by only £4,200 to £124,200. Rosa has now built up an annual pension of

35/60 x £124,200 = £72,450.

This means the value of her pension rights is now

£72,450 x 20 = £1,449,000

The annual increase in the CPI to September 2013 is 3 per cent. The relevant statutory increase is 2.5 per cent. So the relevant percentage for Rosa is 3 per cent. This means that as long as Rosa’s pension rights in the tax year have not increased by more than 3 per cent she will keep FP 2014.

The value of Rosa’s pension rights as at 5 April 20141 increased by CPI would be

£1.4 million x 103/100 = £1,442,000.

This is more than the value of Rosa’s pension rights at the end of 2014-15. Rosa loses FP 2014 from the date her deferred benefits are re-calculated by reference to her increased salary.

Example 4

Angela is a member of a defined benefits scheme. Angela’s pension builds up at a rate of 1/80th of pensionable salary for each year of service. Her scheme also gives Angela a separate lump sum of three times her pension. If Angela dies before she starts drawing her pension a lump sum of four times her salary will be paid.

Angela has successfully applied for FP 2014 and continues to build up benefits after 5 April 2014.

From 2014-15 onwards Angela needs to check at regular intervals during each tax year to see if she has lost FP 2014 at any point in time during the tax year. She does this by testing whether or not the value of her pension rights have gone up by more than the ‘relevant percentage’ for the tax year. The relevant percentage, is either:

  • an annual rate specified in the rules of the pension scheme on 11 December 2012 plus any relevant statutory increase percentage, or where there is no rate specified
  • the higher of the annual percentage increase in the consumer prices index (CPI) for the month of September in the previous tax year and any relevant statutory increase percentage.

The rules of Angela’s pension scheme do not set a percentage by which member’s benefits are increased each year. So Angela needs to check that her pension rights have not gone up by more than the annual CPI increase.

On 5 April 2014 Angela has 35 years of service and a pensionable salary of £140,000. She has built up a pension of

35/80 x £140,000 = £61,250 pa, and a lump sum of

3 x £61,250 pa = £183,750

The value of Angela’s pension rights on 5 April 2014 is therefore

(£61,250 x 20) + £183,750= £1,408,750.

The annual increase in CPI to September 2013 is 3 per cent. This means that to keep FP 2014 Angela’s pension rights on 5 April 2015 cannot be more than

£1,408,750 x 103/100 = £1,451,012.

At 5 April 2015 Angela’s pensionable salary has increased to £144,000. Her annual pension on 5 April 2015 is

36/80 x £144,000 = £64,800.

Angela has also built up a lump sum of

3 x £64,800 = £194,400

This means the value of Angela’s pension rights at 5 April 2015 is

(£64,800 x 20) + £194,400 = £1,490,400.

During the 2014-15 tax year Angela’s pension rights have increased by more than the CPI increase. Angela has lost FP 2014 from the date on which the value of her benefits exceeded £1,490,000 as a result of the combination of additional pensionable service and her pay increase.

Example 5

Emily is a member of a defined benefits scheme. Under the scheme the formula for the pension due to her when she reached the scheme’s normal retirement age is 1/80th x pensionable salary x years and complete months of service. There are no lump sum retirement benefits as of right, only by commutation.

Emily has successfully applied for FP 2014 and continues to build up benefits as an active member after 5 April 2014.

On 5 April 2014 Emily’s pensionable salary is £132,000 and she has completed 23 years pensionable service. So she has accrued a pension of £37,950 pa; with a value, for FP 2014 purposes, of £759,000 (i.e. 20 x £37,950).

Emily is not entitled to a relevant statutory increase in her pension rights.

The annual increase in CPI to September 2013 is, say, 3 per cent.

This means that to keep FP 2014 until (at least) 5 April 2015 Emily’s pension rights cannot at any time from 6 April 2014 to 5 April 2015 be more than £759,000 x 103/100 = £781,770 (equivalent to a pension of £39,088 pa).

Again, Emily knows that her pensionable salary will be frozen over 2014/15. At 5 April 2015 her pensionable salary will therefore still be £132,000. If she continues in pensionable service, then her annual pension on 5 April 2014 would be 24/80 x £132,000 = £39,600, with a value for FP 2014 purposes of (£39,600 x 20) = £792,000.

This is more than £781,770. So Emily knows that if she continues in pensionable service to the end of the tax year, she will at some point before then lose FP 2014.

The scheme accounts for pensionable service in completed months of service. Emily’s pensionable service started on 28 March 1992. So she knows that if she leaves active membership between 28 November and 27 December 2014 inclusive she will have a prospective pension of £39,050 pa (23 & 8/12 / 80 x £132,000); and if she leaves on 28 December she will have accrued an further month’s service giving her a prospective pension of £39,188 pa (23 & 9/12 / 80 x £132,000).

So Emily will lose FP 2014 if she is still in pensionable service on 28 December 2014 when she had a prospective pension of £39,188, which has a value of £783,760. Her FP 2014 will be lost on 28 December 2014.

Emily therefore opts out of active scheme membership before that date.