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Protected tax-free cash exceeding 25%

This article explains the need to protect valuable pre A-Day tax-free cash entitlements held in occupational pension schemes.

The post A-Day pensions regime has now been running for some seven years, and the basic changes in legislation (in terms of funding and benefit entitlement) are largely understood.

Despite this, there is one important segment of the pre A-Day pensions market, where work is potentially outstanding, which could have a significant impact upon how clients can take their retirement benefits. This neglected area is those clients with entitlements held in occupational pensions (including Section 32 buy-out contracts).

Identifying entitlements

It is vital for these clients to have their pre A-Day entitlements calculated to find out the pension commencement lump sum (PCLS) entitlement calculated from the funds in question. By doing so, clients will be able to identify whether they have a protected pre A-Day lump sum entitlement, ie where the PCLS exceeds 25% of the pre A-Day fund value. Crucially, if they do have the higher PCLS it will impact upon how retirement benefits are planned.

The information required for this calculation may, for some individuals, be as simple as providing remuneration details for the employment period concerned. However, some may also have to provide the A-Day values of other accumulated pension rights in order to determine the PCLS applying from employment at A-Day.

As time passes, access to this information may become difficult to obtain. In addition, obtaining A-Day valuations of retained benefits, which may have subsequently been transferred to other providers, will become an increasingly costly and complicated exercise.

Danger of delaying

The longer this exercise is delayed, the harder it will become for clients to provide all the relevant information – meaning the trustees or scheme administrators will be unable to undertake the necessary calculation. This could result in a client’s PCLS being limited to 25% of the fund value from those arrangements; a significant loss which could have been easily avoided.

Multiple schemes

For clients who are members of multiple schemes for the same employment, the situation is further complicated by the calculations needed at A-Day to apportion the client’s tax-free cash between the related schemes from the employment. Where there is a mixture of defined-benefit and money-purchase top-up arrangements, it is likely that the definitions of pensionable salary (and therefore the limits on tax-free cash) may differ between the schemes involved. This means the apportionment process (ie determining the share of the PCLS applied to each connected arrangement) may alter the pre A-Day position.

For many schemes it will be the company or the directors who retain the role of trustee and scheme administrator, and will ultimately be held responsible if they penalise themselves as members due to a failure to act. They should also consider the consequences of failure to act for ordinary employees who are members of such schemes with low funding levels and longer periods of service, where it is more likely the issue of protected A-Day tax-free cash will arise.

Transfer planning requirements

Old Mutual Wealth believes there will be an increasing movement of funds, particularly in the money-purchase marketplace, from occupational arrangements to personal pensions (including SIPPs). However, where part of the funds making up a client’s historical portfolio is accumulated under pre A-Day occupational rules, clients and financial advisers must determine whether any issues may affect the pre A-Day tax-free cash entitlements.

Clients with protected cash wishing to either consolidate with other pension fund assets or aggregate with future funding through an alternative registered pension scheme need to be aware of the transfer process to be used to protect, on transfer, the higher pre A-Day lump sum entitlement.

Member-driven block transfer requests, where more than one member of the scheme transfers their occupational rights to another registered pension scheme, will probably be the more popular route. However, this will only work where the clients have not been a member of the recipient scheme for more than 12 months (unless membership related only to previous contracted-out rebate monies). A further consideration is that a client can only hold one protected tax-free lump sum within a registered pension scheme, no matter how many arrangements are set up. As such, where a client has a protected PCLS in more than one arrangement currently, care as to how transfers are made is vital to avoid any loss of existing PCLS rights.

The only other transfer alternative for funds held in occupational schemes would be where the employer or trustee wishes to wind up the scheme. To provide protection to the pre A-Day lump sum in this instance benefits could, as an alternative to the block transfer option, be transferred into a post A-Day buyout contract. However, clients should be aware that any subsequent transfer may, depending on the product chosen to accept the future transfer, invalidate their protected cash entitlement.

The following table summarises when protection will be kept on transfer:

Pension transfers and protection of tax-free cash and protected pension age
From To Keep protected TFC and or protected pension age?
Personal pension Personal pension Y As long as block transfer conditions** met.
Personal pension S.32 N Can’t meet block transfer conditions.
Personal pension OPS* Y As long as block transfer conditions** met.
S.32 Personal pension N
S.32 S.32 Y Scheme is winding up – meets transfers and reorganisation regs.
Does not matter when original S.32 was set up.
S.32 OPS N
OPS Personal pension Y   As long as block transfer conditions** met.
OPS S.32 Y As long as OPS is winding up.
OPS OPS Y As long as block transfer conditions** met


Occupational Pension Scheme.
** Block transfer conditions: A transfer is a block transfer if it involves the transfer in a single transaction of all the sums and assets representing accrued rights under the scheme from which the transfer is made which relates to the member and at least one other member of that pension scheme. Before the transfer, the member must not have already been a member of the registered pension scheme to which the transfer was made for longer than 12 months before the date of the transfer. The only exception to the 12 month eligibility period of scheme membership applies to members of personal pension schemes prior to 6 April 2006, where membership of the scheme was in respect of receipt of contracted-out rebate monies only.

Summary

There is an unquestionable need for action in this area to ensure members of occupational schemes identify whether their pre A-Day entitlements need to be protected or whether a PCLS of 25% of the fund will be their automatic default, falling into the same structure as other registered pension scheme accruals. This will also form part of a vital wider financial planning exercise for advisers to better define how they can effectively structure a client’s retirement planning for the appropriate ‘at retirement’ solutions.

Support from Old Mutual Wealth

Investors in Old Mutual Wealth occupational schemes benefit from the fact that the schemes operate through a Master Trust, under which Old Mutual Wealth acts as the trustee and scheme administrator. It is still important, however, that employees provide Old Mutual Wealth with the relevant information to ensure analysis of members’ pre A-Day rights as soon as possible.

Old Mutual Wealth has been active in this process since A-Day, and a maximum benefit A-Day questionnaire is available to help you obtain the information required for occupational scheme members’ A-Day benefit calculations.

For current issues see the Citywire article – Adrian Walker discusses how to protect clients’ pre-A-Day tax-free cash.

Once the A-day cash entitlement has been identified, it is revalued up to the point the member receives pension benefits. View our Scheme specific tax free cash calculator to calculate the current tax-free entitlement.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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