It’s now fifteen years since A-Day. Although its significance may have paled in recent years, take it from me: at the time, it was a very big deal. Moving to a single set of tax rules for all pension plans was an audacious move.
But it wasn’t necessarily tidy. Introducing a lifetime allowance, a 25% limit on tax-free cash, and a new minimum pension age for everyone meant designing – sometimes complicated – protection to enable people to keep their superior pension entitlements.
One of these protections was scheme-specific protection. This covered two scenarios. First, where people were entitled to more than 25% tax-free cash from their occupational scheme (including section 32 buyouts) and this would be lost under the new regime. Second, where people were entitled to an early retirement age either because their occupational scheme offered them one, or because they had an individual plan and had a specific job. HMRC held a list of special professions and their early retirement ages – including ballet dancers, wrestlers and professional football players.
If these people weren’t also applying for enhanced or primary protection, they didn’t have to apply for a protection certificate. They were just automatically protected.
However, scheme-specific protection is lost if the member transfers their benefits to another scheme, unless the transfer is a block transfer. A block transfer is where two or more members of a scheme transfer all the sums and assets of one scheme to another. They must both transfer to the same destination scheme, at the same time, in a single transaction, and they can’t have been members of the receiving scheme for more than 12 months.
Sometimes, it’s easy to transfer in a block. But most of the time it isn’t. It can also be impossible. If someone has a section 32 buyout policy – a single person plan – under the rules, they can’t ever transfer as part of a block transfer.
Seven years ago, this rule was temporarily relaxed. For 12 months leading up to the introduction of pension freedoms, people were allowed to transfer on their own, without the requisite buddy, but only if they took their benefits before October 2015. HMRC recognised it was going to be advantageous for many to transfer to a pension scheme that could offer flexible ways of taking retirement income.
But this was too limited a relaxation for many people to make full use of, especially as it ‘forced’ them to take drawdown by a certain date, which may not have fit with their plans or indeed been allowable. Instead, many may now find themselves stuck in an outdated pension plan, with limited options and unable to use pension flexibility to design their retirement income in the most tax-efficient manner. The pandemic’s current pressure on finances will have only brought this predicament into sharp focus. Surely now is the time to review this rule, when pension flexibility has never been so important.
Any financial downside for the Treasury wouldn’t be severe. As A-Day fast recedes into the past, the ratio of pre-A-Day benefits to post-A-Day benefits has shrunk, meaning the protected part is a much smaller part of someone’s overall pot. Plus, those 20-year-old footballers in 2006 are now nearing their 35-year-old retirement age; soon there won’t be many people out there with a protected retirement age.
The fast-approaching Budget will probably not include any big pension tax announcements – these may be saved for a future day. But there is still the opportunity to tidy up some straggling ends. Letting everyone keep their entitlement to higher tax-free cash or a lower pension age seems a good place to start.
This article was previously published by FT Adviser
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