It’s 17 years since I joined this industry in the run up to A-day and pension simplification. I recall colleagues explaining to me how much more straightforward things were going to be under the new system and feeling grateful that I didn’t need to understand all the intricacies of the old world.
Of course we all know what’s happened since, but 16 years on since the introduction of the Lifetime Allowance, and in particular Enhanced Protection, there are still anomalies that crop up from those original A-day changes that can cause hiccups in the planning process.
You probably know the basics of when Enhanced Protection (EP) can be lost. Principally when -
- relevant benefit accrual occurs; or
- an impermissible transfer is made; or
- a new arrangement is set up for reasons other than to accept a “permitted transfer”.
The rules are broadly the same for the fixed protections.
In DC world relevant benefit accrual is straightforward – have contributions been made? Impermissible transfers relate to transfers from an arrangement which did not relate to the individual. There is a specific carve out for pension sharing orders though, so a pension credit received into an existing pension arrangement will not be deemed impermissible and will not cause a loss of protection.
So far so good.
However, what happens when the individual doesn’t have an arrangement already set up that can receive the transfer? By definition of the fact the individual holds EP they must have some pension arrangements, but these could be closed and/or DB schemes that won’t accept transfers. If they were to set up a new arrangement is the transfer permitted?
If we look at the rules a DC member can transfer their benefits to a new DC arrangement without protection being lost. However, the rules are different when the pension rights being transferred were not built up in the hands of the individual who is now setting up the new arrangement. This will include those who receive a pension credit on divorce, and those that inherit pension rights as a beneficiary.
Looking at a divorcee with EP first. Setting up a new arrangement to receive the pension credit would not be a permitted transfer. For these cases it may be preferable to split the assets differently so they don’t receive any of their ex’s pension (when you consider they must have sizeable pension savings themselves already to hold EP).
The rules on death benefits have changed significantly since EP was introduced, and now any nominated beneficiary can keep the funds in a pension, meaning there are more likely to be instances where potential beneficiaries hold EP. If a new arrangement is set up it appears there is a risk that this could cause the protection to be lost. Given the fact the funds being transferred have already been tested against the deceased’s LTA, and that they will never be tested against the beneficiary’s own allowance, this seems particularly bizarre and very likely unintentional. Unfortunately HMRC will usually only confirm on specific cases so it may be worth checking with them if you have this scenario. Although keeping the death benefits in the pension is usually the more tax-efficient option, in cases where it could cause loss of protection it may be better to take the lump sum.
This article was previously published by Professional Adviser
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