Primary Protection and Enhanced Protection

Pensions Reform – Key Questions

What is A Day?

The new pension regime starts on 6 April 2006 & this is known as 'A Day'.

How much can I invest?

The current funding rules are to be replaced by an “annual allowance”. The annual allowance figures for the next five years are:

06/07	07/08	08/09	09/10	10/11
£215k	£225k	£235k	£245k	£255k

An individual will be able to contribute the lower of the allowance or relevant income (this is salaried income and excludes other benefits such as share options). If a contribution is made to your pension fund in the year when you take benefits from the scheme, it will not be tested against this allowance.

What is the lifetime allowance?

This is how the Inland Revenue will prevent excessive pension savings from building up within registered pension schemes. The statutory lifetime allowance figures for the next five years are:

06/07	07/08	08/09	09/10	10/11
£1.5m	£1.6m	£1.65m	£1.75m	£1.8m

What happens if I exceed the lifetime allowance?

Your pension fund will be tested at the time you take your benefits and would be subject to a penal tax charge unless you get protection from the lifetime allowance charge.  This can be done by registering with the Inland Revenue either for:

• Primary Protection, or
• Enhanced Protection

What is Primary Protection?

This is available to you if you have pension assets in excess of £1.5 million before A Day. The fund value will be indexed in line with the increases made to the statutory lifetime allowance up to the date when you take your benefits.

What is Enhanced Protection?

This is available to everyone regardless of size of pension fund pre 'A Day' but contributions to all existing money purchase pension arrangements and benefit accrual under any defined benefit arrangement will have to cease. Also, if you opt for enhanced protection you will not be allowed to become an active member (or make additional contributions) in any new post 6 April 2006 registered pension scheme.

Why should I opt for enhanced protection?

If you believe that your pension fund will in the future, exceed the lifetime limit then you should register for enhanced protection. This is most likely where you are a long way off from taking your benefits, if you think your investment will have very strong growth or a combination of both. If you are unsure, then you should seek advice.

Can I protect my tax-free cash?

There are three ways you can protect this:

1. If you register for primary protection and your pre A Day cash entitlement exceeds £375k. The protected tax-free cash figure is increased in line with the increase to the statutory lifetime allowance up to the date benefits are taken.

2. If you register for enhanced protection and your pre A Day cash entitlement exceeds £375k. In this situation the tax-free cash figure at A Day is expressed as a percentage of the A Day fund value and this percentage is then applied to your fund when benefits are taken.

3. Where neither primary nor enhanced protection applies but your pre A Day cash entitlement is more than 25% of your fund value. The protected tax-free cash figure at A Day is increased post A Day in line with the increase to the statutory lifetime allowance, up to the date benefits are taken.

 

An additional lump sum of 25% of the post A Day contributions may also be taken provided it is within the new limits. This third form of protection is lost if you transfer benefits to another pension scheme, unless it is part of bulk transfer.

What can I invest in?

You will be able to invest in a greater range of assets. So in addition to currently acceptable investments there will be the flexibility to invest in such assets as residential property, works of art, vintage cars, gold bullion or wine. Some of these investments will incur a tax charge if used by yourself or your family.You will need to check whether your pension provider will allow these investments as not all pension companies are likely to offer this flexibility.

Will I still be able to borrow in my pension?

Yes, but there are new borrowing limits that will apply to all schemes and they must be secured.The maximum amount your fund will be able to borrow is 50% of the fund value.

What are my options when I come to retire?

Retirement benefits will be classed as either Secured Income or Unsecured Income.

What is secured income?

A pension benefit before age 75 must be secured by either a lifetime annuity, or a scheme pension and after age 75 by an Alternatively Secured Pension, which operates like income withdrawal but with different rules.

What is unsecured income?

This is income withdrawal but the new rules are different. The minimum income is zero and the maximum is 120% of a single life annuity based on tables prepared by the Government Actuary’s. The maximum income will be reviewed every 5 years.

What happens to my pension if I die?

The main changes are:

• On death before vesting, a lump sum up to the lifetime allowance can be paid tax-free.
• Dependant’s pensions are not tested against the lifetime allowance.
• A lump sum on death during income withdrawal will be taxed at 35%.
• On death during Alternatively Secured Pension the fund must be used to provide dependants’ pensions, but where there are no dependants it can be reallocated to other scheme members or paid to a charity.

When will I be able to draw a benefit from my pension?

From 6 April 2010 the minimum normal retirement age will increase from 50 to 55. You will also be able to take benefits even if you are still working removing the need to “retire” from employment in order for benefits to come into payment.

What happens if I get divorced?

Where a former spouse receives pension rights under a Pension Sharing Order effective after A Day, these will count against his/her lifetime allowance.The donor will therefore be able to contribute to their pension to make up the amounts paid out as a result of the order up to the contribution limits.

Important Note

This summary represents Coutts’ interpretation of current and proposed legislation and Inland Revenue practice as at 17 May 2005. The current Inland Revenue rules are extremely complex and the proposed changes lack a lot of detail so should be used as a general guide and you should seek specific advice for your circumstances.