There are two main types of transitional protection for benefits built up before A-day
- Primary Protection
- Enhanced Protection
There are also protections in the new regime for people with rights to take more than 25% of their pension rights as a lump sum and for people who can receive their benefits earning than the minimum pension age in the new regime.
Max Benefits before A day
- Under the tax rules in force before A day, the benefits that members of occupational schemes could receive were limited by reference to their earnings, the length of time worked for the employer, and when they joined the scheme
- Pepole had until 5 April 2009 to register with HMRC for primary/enhanced protection and there is no time limit in which a scheme specific right to a tax free cash of more than 25% can be claimed.
- Before 1987 the max pension would be allowed after 10 years.
- Pre - 87 regime
- 87-89 regime or post 87 regime
- post 89 regime
Pre 87 - Employees who joined the employers scheme before 17 March 1987
87-89 - Employers scheme set up before 14 March 1989 and Employee who joined the scheme on or after 17 March 1987 but before 1 June 1989
Max Benefits before A day (2)
Post 89 regime - Employee who joined a scheme which was set up on or after 14 March 1989 or Employee who joined an existing scheme on, or after 1 June 1989.
Benefits must fall within the old max limits.
Max approvable pension at normal retirement date was expressed as a fraction of each employees final gross remuneration.
Definitions of remuneration:
Basic wage/salary for any of the five years before retirement, or date of leaving pensionable service, plus the average of fluctuating emoulments over a period of three or more consecutive years ending at the point at which basic wage/salary was determined.
The average of gross earnings for any period of three or more consecutive years. The last of these consecutive years had to fall within 10 years of leaving pensionable service.
Max Benefits before A day (3)
1987-1988 all employees with gross final remuneration in excess of £100,000 had to use three or more consecutive years earnings ending within ten years of the retirement date or date of leaving pensionable service as the calculation of final gross remuneration. The same was true for controlling directors.
The earnings cap introduced a max earnings figure for members subject to the post 89 regime. In the 2005/06 tax year it was £105,600.
Maximum approvable pension
- The maximum approvable pension was 2/3rds of final gross remuneration, subject to the earnings cap for Post 89 members.
- To qualify for maximum approvable benefits the employee normally had to have worked for the employer for 40 years service.
- This is equivalent to 1/60th of final remuneration for each year of service.
- However for 87-89 and post 89 regime members accelerated accrual was allowed for people retiring with less than 40 years service.
- The max allowable rate was 1/30th of final remuneration for each year of service, meaning members with 20 or more years service could receive the full two thirds pensions.
- Pre 87 members were allowed to receive what was known as uplifted sixtieths.The max pension was available to members who had completed at least 10 years service.
- In calculating a members max allowable pension, the scheme had to deduct retained benefits from the maximum allowable benefit.
Maximum Tax free lump sum
- Part of max pension could be commuted for TFC
- Max allowable tax free cash sum was 3/80th of final gross remunderation for each year of pensionable service up to a maximum of 40 years.
- Thus 3/80 x 40 = 120/80 or one and a half times final remuneration.
- For members subject to the post 89 regime the max tfc sum is 2.25 times te gross pension entitlement before subtraction of the amount of tax free lump sum and any dependants pensions.
- Using accelerated accrual provisions, the maximum tax free lump sum could be provided after 20 years of pensionable service for pre 87 and 87-89 members. For 87-89 members, accelerated accrual could not be applied to increase the tax free lump sum unless it was also used to increase the amount of pension.
- The tax free sum is also subject to the restrictions earlier, limiting the maximum remuneration on which benefits could be calculated
- Retained cash sums had to be included in the calculation of the maximum lump sum . These overall limits applied to money purchase schemes as well as to final salary schemes.
- Requirement that retained benefits in other schemes were taken into account when calculating the max allowable benefits that an occupational scheme could provide to an individual.
- There were some relaxations from the requirement to take account of retained benefits. These were as follows:
- Members who were not controlling directors, or had not been in the ten years before joining the scheme, and who did not earn more than 25% of the earnings cap in force when they joined the scheme.
- A similiar relaxation applied to people who receive a share of a former spouses pension rights on divorce. This relaxation was the same as above, except it related to earnings in the year the marriage was dissolved.
The finance act 2004 introduced the following additional relaxations for calculating the amount of tax free cash a person was entitled to under the rules in force befor A day:
- People who
- Pension benefits worth more than the SLA at A day
- Increases value of the benefits on 5 April 2006 in line with SLA allowance up to date of crystallisation.
- Member can accrue further benefits with Primary Protection
MP schemes - value of the members fund is used
DB scheme - accrued pension multiplied by 20 - if TFC is provided seperately then this to be added after.
For occupational and statutory schemes, the total value of the benefits is restricted to 20 times the maximum permitted pension (MPP)
Maximum Permitted Pension
- Is the maximum annual pension that could be paid to the person on 5 April 2006, asuuming the person left service on that date.
- If the MPP is exceeded, the value of the excess cannot have primary protection. When benefits are crystallised a lifetime allowance charge may be payable on the value of the benefits above the persons lifetime allowance.
- Benefits a person has already crystallised at 5 April 2006 are valued at 25 times the annual rate of pension payable at that date.
- No account is taken of any dependants pensions
- If the member is taking income withdrawals, the pension is deemed to be the maximum annual income withdrawal for the year in which 5 April 2005 falls, irrespective of the actual level of income withdrawal being taken.
Primary Protection Factor
- Once value of benefits has been determined, it is used to calculate a primary protection factor.
Value of uncrystallised benefits - SLA in force on 5th April 06 / SLA in force on 5 April 2006
This gives the factor that is used to increase the SLA in force when benefits are crystallised.
- Enhanced protection provides full protection for the value of a persons pension rights accrued on 5 April 2006, regardless of any subsequent growth in value.
- The option of Enhanced protection is available whether or not the total value of pension rights on 5 April 2006 exceeds 1.5 million
- If benefits exceed the maximum permitted pension, ehanced protection is not available.
- Election for enhanced protection means that individuals will avoid any LTA charge on their funds, regardless of the level of growth, provided 3 conditions are met:
- 1. NO FURTHER PENSION BENEFITS ACCRUE
- 2. NO TRANSFER OF BENEFITS AFTER A DAY OTHER THAN PERMITTED TRANSFERS
- NO NEW REGISTERED SCHEME
Revocation of Enhanced Protection
- Enhanced protection is revoked at any time before their 75th birthday if the member:
- Becomes a member of a registered pension scheme
- Resumes active membership of a registered scheme
- arranges a transfer that is not a "permitted transfer"
Consequences of revocation
- When enhanced protection is revoked, primary protection will be applied instead, provided the individual has applied for and been granted primary protection by 5 April 2009.
The New Lifetime Allowance (Underpinned LTA)
- The LTA will fall to £1.5 million from 6 April 2012
- The underpinned lifetime allowance will be introduced, which is the greated of £1.8 million and the current annual allowance.
- The result is that the 2010/11 level of revaluation (based on a lifetime allowance of £1.8 million) is frozen until the post 2011/12 lifetime allowance rises above £1.8 million. The benefit ceiling set by primary protection is therefore likely to be fixed for some considerable time.
- Will require an election to be made to HMRC by 5 April 2012 for benefit testing to continue to be based on the £1.8 million lifetime allowance.
- No new registered scheme can be established for the individual on or after 6 April 2012, unless it is to receive only a transfer of existing benefits.
- From 6 April 2012 no contributions may be made to a MP arrangement.There are two limited exceptions:
- NI contracting out rebates. A 2011/12 is the final year of DC contracting out, this is strictly limited benefits and
- Contributions to a life assurance policy that started before 6 April 2006.
- The amount of benefits that can be accumulated under a DB or Cash balance scheme on or after 6 April 2012 will be limited to not exceeding the "relevant percentage"
- The defiition of relevant percentage is similar to, but not the same as , that which applies for relevant benefit accrual.
- The relevant percentage for a deferred member of a DB scheme is:
- An increase in the members pension during the tax year of no greater than:
- The annual rate used to revalue the members benefits as specified in the scheme rules at 9 December 2010, or if none:
- The increase in the CPI in the year ending in September of the previous year.
In effect this means that for an active member of a DB scheme, the relevant package is the increase in the CPI over the year ending in September of the previous year. In practice this means that few, if any, active DB members will be able to continue to accrue further benefits under their scheme without breaching the relevant percentage.
Protected Tax free cash
- The protection can take one of three forms:
- Neither enhanced nor pimary protection apply, even though the TFC entitlement under an arrangement is greater than 25% of the uncrystallised rights at 5 April 2006
- Primary protection applies and the TFC is greater than £375,000 at 5 April 2006
- Enhanced protection applies and the tax free cash rights are greater than £375,000 at 5 April 2006.
Scheme Specific right to tax free cash of more tha
- For an occupational scheme, this lump sum may not exceed the maximum permitted lump sum that can be paid to the member.
- Where this is moer than one scheme in relation to any employment, the calculation of the maximum is taken across all schemes relating to that employment.
- Any cash restrictions that applied to transfers from occupational schemes before A day do not need to be taken into account.
- For retirement annuities, the cash entitlement is assumed to be 25% of the fund on 5 th April 2006.
With and Without post A day accrual/contributions
- Prior to 1 Jan 2009 the tax free cash available when benefits were drawn depended on whethere there are any post A day benefits.
- If there was no further accrual and no contributions to the scheme, the maximum cash available when benefits were drawn was the greater of:
- The 5 April 2006 figure increased in line with the rise in the SLA or
- 25% of the value of benefits crystallised
However the cash sum could not exceed 25% of the SLA in force when benefits were crystallised.
If there was further accrual of benefit or further contributions, the calculation was more complicated. The formula is: VULSR X (CSLA/FSLA) + ALSA
ALSA is (LS+AC) - (VUR X FSLA/CSLA)/4 with a min of zero
LS + AC is the amount available to provide income and cash when benefits are drawn.
VUR - The total value of the fund on 5th April 2006.