Protect your client's Protected Pension Age
The need to protect existing pension rights meant that many of the pension rules that were in place before pension simplification in 2006 were transitioned into the new pension regime. Generally, doing so put the scheme member in a better position than they would have been under the new rules.
This group of rules included Scheme Specific Protection, where an individual could take more than 25% of their pension funds tax-free and/or was allowed access before the normal minimum retirement age.
A recent case involving police officers covered by FT Adviser demonstrated the importance of bearing the subtleties of these rules in mind to ensure clients don’t fall foul of them. The High Court ruled in favour of the police officers, signifying that the employer should’ve made them aware of the tax implications of taking up further employment within one month of their retirement.
The main considerations for retaining protected pension age are: the transfer rules, requirements at the individual’s initial Benefits Crystallisation Event (BCE) and employment. I’ll discuss each in turn.
When moving funds from the scheme where the protected pension age arose to another pension, in order to retain the protection this must be completed as part of a block transfer. As a reminder, the block transfer criteria are:
- there must be two or more members transferring from and to the same scheme;
- all sums and assets relating to those involved must be transferred as a single transfer; and
- the member holding protection cannot have been a member of the receiving scheme for more than 12 months prior to the transfer.
Assuming all of the above criteria is met, the protected pension age remains in place in the new scheme.
The main consideration when it comes to taking benefits where there is a protected pension age in place is that the scheme member must fully crystallise their pension fund. If not, they will lose their protection.
It is also worth remembering that the client’s available lifetime allowance (LTA) is reduced by 2.5% for every complete year between the date benefits are taken and the normal retirement age of 55.
An important wrinkle also applies in certain cases in respect of the individual’s employment. The restrictions depend on whether the protection applies below 50 or from 50 to age 54.
A protected pension age, when protected below age 50, will be lost if a client:
- takes their benefits;
- is employed by a sponsoring employer in the scheme under which the benefits are paid; and
- is ‘connected’ with that sponsoring employer.
‘Connected’ in this context essentially means that the person has control over the company.
For example, a footballer can take benefits at their protected age and continue to play for the club, as long as they do not own or control the club.
Where the protected pension age is between 50 and 54, the protection is lost if after taking benefits the individual is employed by:
- an employer who employed the individual in the six months before the benefit entitlement arose;
- any person connected with the above employer; or
- any sponsoring employer in the pension scheme (where benefits entitlement arose).
Therefore, in this instance, if the individual returns to work with the employer, their protected pension age will be lost from the date of re-employment.
As I’ve outlined above, many of the historic rules are now out of date and don’t fit well with the current pension environment; they also serve as an obstacle to effective retirement planning.
The successive layers of legislations have added several tiers of unnecessary complexity. Simplification of these rules would appear to be the most appropriate course of action.