Pre April 2006 Pension Rules

Pension Transitional Protection Tax Free Cash

Many people have pension funds that before 6 April 2006 already exceeded new lifetime allowances introduced on 6 April 2006 or had tax free cash sums available at figures greater than the 'blanket' maximum of 25% of the fund value brought in for all pension schemes on the same date.   

To ensure people were not penalised, new rules also offer you the flexibility of protecting the options that you had before April 2006.   

This is known as Transitional Protection  

There are basically two types of protection that people may need:  

Lifetime Allowance Protection

To protect those who have already exceeded the lifetime contribution allowance of £1,500,000 when the new rules started on 6 April 2006.   

Primary Protection is available to people whose pension funds have exceeded the Lifetime Allowance of £1,500,000 on 6 April 2006.  

Tax Free Cash Protection

To protect those whose tax free cash entitlement already exceeded the 25% of fund value tax free cash limit on 6 April 2006.   

Enhanced Protection is available to all people who wish to protect their tax free cash entitlement as it is greater than 25% of the fund value at 6 April 2006.  However, this protection is conditional on you not gaining any further pension benefits after the new rules start on 6 April 2006.

For more on pension transitional protection contact us today.

1.  Primary Protection for Lifetime Allowance - Pension Simplification Laws

Primary Protection is available to people whose pension funds have exceeded the Lifetime Allowance.

If your pension value already exceeded £1,500,000 on 6 April 2006, you can elect to set your own unique Lifetime Allowance at the fund value you had at 6 April 2006.   

The value at 6 April 2006, your primary protection, is then indexed (increased in line with the rate of increase) using the same factors as the normal lifetime allowance increases.  

E.g.  Normal Lifetime Allowance figure for 2006/2007 is £1,500,000 and for 2007/2008 it is £1,600,000.   

Therefore, if you already had a pension fund of £3,000,000 at the start of the new regulations on 6 April 2006.  You can register £3,000,000 as your Primary Protection.   

Your initial Primary Protection is double to official Lifetime Allowance threshold.    Therefore, for the tax year 2007/2008 your Primary Protection threshold is double the official Lifetime Allowance for 2007/2008 (£1,600,00) i.e.  your Primary Protection has increased to £3,200,000.   

IMPORTANT 2009 DEADLINE

You have until 5 April 2009 to register your pension for Primary Protection if it complied with the requirements on 6 April 2006.

Growth on your ‘Primary Protection’ Fund 

If your Primary Protection fund then grows at a rate that exceeds your Primary Protection level any excess when you come to retire will be subject to a Lifetime Allowance tax charge much in the same as when the normal limits are exceeded:

Taking Excess Pension Fund Over Primary Protection as Cash Lump Sums:

• You will still be able to withdraw 25% of the total fund as a cash lump sum only some of it tax free. 
• You will be able to withdraw 25% of the Primary Protection fund level as tax free cash. 
• The excess funds above the Primary Protection level will be taxed at 55%.   

Taking Excess Pension Fund Over Primary Protection For Income

• You will still be able to use the remaining 75% of the total fund to deliver your pension income. 
• This 75% of the Primary Protection fund level will provide you with a pension income subject to normal income tax rules. 
• The excess funds above the Primary Protection fund level will be taxed at 25% as a one off and the remainder will then provide you with a pension income subject to income tax as normal.   

You can of course opt for Enhanced Protection on the pension fund values to protect cash only and guarantee no Lifetime Allowance tax charge for any future growth on your fund.

Speak to a professional free and learn how you could benefit from primary protection.

2. Enhanced Protection and Lifetime Allowance - Pension Simplification Laws

Enhanced Protection is available to all people and is most likely to be used by those who wish to protect their tax free cash entitlement as it is greater than 25% of the fund value.   

However, this protection is conditional on you not gaining any further pension benefits after the new rules start on 6 April 2006.   

No Lifetime Allowance tax charge for Enhanced Protection!  

Opting for Enhanced Protection on your pension fund means that your pension fund can grow to any level and your tax free cash entitlement is protected without any worries that you will receive additional tax charges unlike the Primary Protection option where successful fund growth may mean a Lifetime Allowance tax charge.   

3. Enhanced Protection for Tax Free Cash - Pension Simplification Laws

Enhanced Protection is available to people who wish to protect their tax free cash entitlement as it is greater than 25% of the fund value on 6 April 2006.   

Unlike Primary Protection on Tax Free Cash, opting for Enhanced Protection on your tax free cash entitlement means that your pension fund can grow to any level without any worries that you are restricting your future tax free cash entitlement.   

The Enhanced Protection level for Tax Free Cash is established as a % of the pension fund, greater than 25% on 6 April 2006.   

This % is then the amount of tax free cash you will be allowed to withdraw at ‘retirement date’.  This means that as your fund grows, at the same time, your entitlement to tax free cash is growing.   

• For example, if you were entitled to 36% tax free cash of your pension fund at 6 April 2006, provided you register this fact and comply with the rules below, you will still be entitled to the same 36% of the fund irrespective of how big the fund grows to

IMPORTANT NOTE:

Enhanced protection is conditional on you not gaining any further pension benefits after the new rules start on 6 April 2006.  

IMPORTANT 2009 DEADLINE:

You have until 5 April 2009 to register your pension for Primary Protection if it complied with the requirements on 6 April 2006.

What happens if I transfer my pension to another pension scheme?

If you subsequently transfer pension benefits after 6 April 2006 you will lose your Enhanced Protection and receive the normal 25% entitlement.  You could get tax free cash speak to an adviser.

4. No Protection Option for Tax Free Cash - Pension Simplification Laws

This option is likely to appeal to those who are unlikely to achieve the high pension fund value amounts of the Lifetime Allowances but do have potential tax free cash entitlements in excess of 25% of the fund value.   

In simple terms, for most of us with smaller pension funds, it gives us the “Best of Worlds”. 

If you opt for no protection of your tax free cash entitlement on 6 April 2006, this gives you greater flexibility.   

Your tax free cash is calculated as the lower of 

1. 25% of the Lifetime Allowance or  
2. The higher of 25% of the Fund or the Certified maximum amount of Tax Free Cash subject to increases in line with the Lifetime Allowance.  

For example:  Let us assume on 6 April 2006 you had a Section 32 Buy Out Plan pension scheme with a fund value of £100,000 and a certified tax free cash maximum of £30,000.  This is 30% of the fund.   

By opting for no protection, if in 2010/11 your fund has grown to £120,000. 

The maximum tax free cash is the lower of:  

1. 25% of the Lifetime Allowance i.e.  25% X £1.8m i.e.  £450,000 or  
2. The higher of 25% of the Fund  (£120,000 X 25% = £30,000) or the Certified maximum amount of Tax Free Cash subject to increases in line with the Lifetime Allowance i.e.  £30,000 + lifetime allowance increase £1.5m to £1.8m (20%) = £30,000 + 20% = £36,000.  

In this example the maximum tax free cash we would use is the certified amount linked to increases i.e.  £36,000.   

However, what if for the same example the pension fund had grown to £150,000 instead of £120,000?  

The lower of:  

1. 25% of the Lifetime Allowance i.e.  25% X £1.8m i.e.  £450,000 or  
2. The higher of 25% of the Fund  (£150,000 X 25% = £37,500) or the Certified maximum amount of Tax Free Cash subject to increases in line with the Lifetime Allowance i.e.  £30,000 + lifetime allowance increase £1.5m to £1.8m (20%) = £30,000 + 20% = £36,000.  

In this example the maximum tax free cash we would use is the 25% of fund value i.e.  £37,500!  

In summary, the ‘No Protection’ option gives greater flexibility on the tax free cash calculation for those of us with smaller pension funds.   

What happens if I transfer my pension to another pension scheme? 

If you transfer pension benefits to another pension scheme after 6 April 2006 you will lose your “certified tax free cash” protection.