Retirement planning Demo
4. Transitional protection
In this chapter we look at the transitional protection measures put in place on A-Day.
Although one aim of pensions simplification was to replace the eight pr...
Shortened demo course. See details at foot of page.... rules are possibly some of the most complex aspects of the new regime.
Enhanced protection is available to everyone with pre A-Day benefits irrespective of the value of their pension rights. An election for enhanced protection fully protects an individual against the lifetime allowance charge regardless of how their pension rights grow after A-Day.
Relevant benefit accrual
In return for this valuable protection the individual must cease all relevant benefit accrual under registered pension schemes after 5 April 2006.
For money purchase arrangements
This broadly means that no contributions can be paid to the scheme after 5 April 2006. The only exceptions are that NI rebates to existing contracted-out plans can continue (until 5 April 2012 when contracting-out stopped being allowed), as can contributions to certain existing death in service arrangements.
For defined benefit schemes
It means that the crystallised value of the benefits when they are taken (or transferred) must not be more than the appropriate limit for those benefits. The appropriate limit is the value of the pension rights on 5 April 2006 (calculated as 20 times the accrued pension plus any separate lump sum), increased to the benefit crystallisation date by the greater of (a) the relevant indexation percentage or (b) the post-commencement earnings limit.
(a) The relevant indexation percentage is the higher of:
The percentage increase in the Retai...
Shortened demo course. See details at foot of page....protection.
It was not possible for individuals to include rights to life assurance or other death benefits that existed on 5 April 2006 when registering retirement benefits for enhanced protection. However, there are rules which allow the recipients of their death benefits to benefit from protection if the value of the death benefits at 5 April 2006 was higher than the value of the protected retirement benefits.
Contributions to a money purchase arrangement to fund life can continue without the loss of enhanced protection provided the following criteria are met:
They're are used to fund life cover under a contract of insurance
The insurance contract was made before 6 April 2006
There's no right to surrender any rights under the policy
There's no payment under the policy except on the individual's death
The policy isn't varied significantly.
If a policy is surrendered and replaced by a new one, either to comply with:
The Employment Equality (Age) Regulations; or
Section 255 of the Pensions Act 2004 (which prohibits 'life assurance only' categories under occupational pension schemes where there's no intention to ever provide pension benefits for the members in the life assurance only category).
How can enhanced protection be revoked?
Answer : Purchase course for answer
Only individuals with pension rights valued at more than £1.5m on 5 April 2006 could have applied for primary protection. An election for primary protection gives an individual a personal lifetime allowance that is larger than the standard lifetime allowance and allows contributions to continue or benefits to continue to build-up after A-Day. This gives increased protection against the lifetime allowance charge but the charge will still arise if the crystallised value of benefits when they are taken exceeds the personal lifetime allowance.
The primary protection factor
The primary protection factor is the increase to the standard lifetime allowance for someone with primary protection. The factor is calculated as:
(A-Day benefit value - £1.5m)/£1.5m
Whenever benefits are crystallised, this factor is applied to the standard lifetime allowance to give the personal lifetime allowance for the individual.
Paul has benefits worth £2.25m at A-Day. This means that Paul’s primary protection factor is 0.5 i.e. (2.25-1.5)/1.5. To put t...
Shortened demo course. See details at foot of page....rotection. However, there are rules which allow the recipients of their death benefits to benefit from protection provided the following criteria are met:
The value of the death benefits at 5 April 2006 was higher than the value of the protected retirement benefits, and was within HMRC limits. Any lump sum earmarked to provide dependants' pensions is not taken into account.
Where there is a lump sum death benefit payable under a life assurance policy on 5 April 2006 from a scheme (other than an occupational pension scheme with at least 20 members), the policy is not varied 'significantly' between 5 April 2006 and the date of death.
· For all occupational schemes, if:
- The member dies in the service of the employer who they were employed by on 5 April 2006
- The employer was the scheme sponsor on 5 April 2006; and
- The member had not become entitled to benefits from the scheme before their death.
Where an individual applied for both enhanced and primary protection which of them took priority?
Answer : Purchase course for answer
The maximum pension commencement lump sum (tax-free cash) rights since A-Day are 25% of the value of the benefits. At A-Day this equated to a maximum pension commencement lump sum of 25% x £1.5m = £375,000. In 2011/12 it was 25% of £1.8m, and in 2012/13, it has reduced to 25% of £1.5m.
There are however 3 types of pension commencement lump sum rights that can be given transitional protection:
Where a member elected for primary protectio n any pension commencement lump sum (PCLS) entitlement of more than £375,000 also had to be registered for primary protection. The member's pension commencement lump sum entitlement is calculated as at 6 April 2006 and this amount will be increased each year in line with increases in the lifetime allowance.
Primary protection example
Dennis has a registered PCLS of £500,000 under primary protection. He decides to crystallise his benefits in tax year 2011/12 when the lifetime allowance is £1.8m. The maximum PCLS Dennis can take is £600,000 i.e. £500,000 x (1.8/1.5). Even though the lifetime allowance has reduced to £1.5m from 6 April 2012, £1.8m (or a higher amount if the lifetime allowance is increased beyon...
Shortened demo course. See details at foot of page....mber's policy on the wind-up of the scheme.
Scheme-specific lump sum protection example
John had benefits worth £100,000 at A-Day including a protected PCLS of £50,000. He continues to fund his pension until he decides to draws it in tax year 2012/13 when his fund is worth £200,000 and the lifetime allowance is £1.5m.
John’s protected PCLS is £60,000 i.e. £50,000 x (1.8/1.5) and his additional PCLS is £25,000 i.e. 25% x [£200,000 – (£100,000 x 1.5/1.5)]). So John can take a PCLS of up to £85,000.
Some pre A-Day members of occupational pension schemes were entitled to a PCLS equal to their fund value. After A-Day, the whole of their fund can be taken as a lump sum provided they have had no relevant benefit accrual (see section on enhanced protection) and they didn't have lump sum protection with enhanced or primary protection. The lump sum must be taken in a single transaction.
Which type of pre A-Day pensions could have built up a pension commencement lump sum entitlement of greater than 25% of the value of pension benefits and therefore benefit from scheme specific protection?
Answer : Purchase course for answer
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