Alan, 42, had been a journeyman footballer in the late 90s and much of the 00s. After retiring he’d carved out a successful career as a football agent.
In his playing career he’d built up a pension through the Football League’s scheme, then transferred his benefits to a SIPP shortly before A-Day allowing him to retain his protected pension age of 35. His SIPP was worth £125,000.
His post-football employment meant he hadn’t taken any benefits and had accrued pension savings of £540,000 in a couple of schemes linked with his new employers, which held the normal minimum retirement age of 55.
He was now looking to set up his own agency and make use of the protected pension age to take tax free cash from his SIPP, to help start the business.
Alan’s adviser, Jonathan, had a number of issues to consider.
Jonathan knew it was possible to transfer the benefits from the two schemes with a retirement age of 55, into the SIPP and use the protected pension age. Although this was allowed and would mean the protected pension age was ‘inherited’ it was not without potential downsides.
A significant issue would be the removal of flexibility over taking benefits. A condition of using a protected pension age was that all funds in the SIPP would need to be crystallised at the same time.
This would remove any chance of growth on uncrystallised funds allowing more tax free cash – the £540,000 in the other schemes would permit £135,000 in tax free cash now, but could generate more in the future.
Perhaps more significantly, the mechanics of the lifetime allowance (LTA) when a protected pension age was involved could create issues.
When benefits were crystallised with a protected pension age, the value of the individual’s LTA was reduced by 2.5% for each complete year between the crystallisation and the minimum pension age. With Alan being 42 there were 12 complete years before age 55, meaning his LTA would be reduced by 30% from £1 million to £700,000.
If Alan combined his benefits and crystallised them all, he’d use up 95% of his reduced LTA (£665,000/£700,000)*100.
Leaving Alan with only 5% of his LTA for any pension benefits he built up from future earnings, even though this would be based on a LTA of £1 million when he took benefits at age 55, didn’t seem sensible.
Jonathan considered applying for fixed protection 2016 –Alan hadn’t paid any contributions since 6 April 2016. This would mean the 30% reduction in LTA would be based on £1.25 million and mean that Alan would only use up 76% of his LTA.
Jonathan’s initial thought was that the protection would stop Alan from being able to contribute in the future, and that this was too big a restriction.
He considered whether it was worth Alan just using the benefits in the SIPP and leaving the other pensions where they were. However Alan was adamant that the tax free cash from the SIPP alone wouldn’t be sufficient and Jonathan knew that taking any pension income would bring the Money Purchase Annual Allowance (MPAA) into play, severely restricting the scope for contributions in the future.
Then Jonathan had a brainwave. There was nothing to stop them applying for fixed protection 2016, meaning only 76% of Alan’s LTA was used up now rather than 95%, and then breaking the protection to give Alan scope to contribute in the future.
This wouldn’t affect the percentage of the LTA used up now, because protection was held when the crystallisation event took place, and so would leave Alan with 24% of the standard LTA left over for later crystallisation events, and as long as he took nothing other than tax free cash from his pension the MPAA wouldn’t be a factor allowing decent contributions in the future.