Lump Sum Benefits – Transitional Protection Print

Individuals who registered funds in excess of £1.5 million at A-Day via Primary Protection could also protect any tax-free lump sum entitlement (now known as Pension Commencement Lump Sum, “PCLS”) over £375,000. After A-Day an individual can take the amount of the pre A-Day lump sum rights increased to the same extent as the increase in the lifetime allowance.

Individuals who registered for Enhanced Protection have their tax free cash protected in one of two ways:

For those with tax free lump sums below £375,000 but above 25% of the fund value, the amount of the pre A-Day lump sum rights increased to the same extent as the increase in the lifetime allowance.

For those with tax free lump sums in excess of £375,000, the relevant percentage of the pension value as at A-Day will carry forward as the entitlement for vesting after A-Day as a tax-free lump sum.

Interaction between the Lump Sum Benefit and the Transitional arrangements.

Whilst individuals registered their funds in excess of £1.5m, they also had to register the percentage of pension commencement lump sum.

Examples:

Sarah registered for “Primary Protection Status”

Registration day

Sarah’s pre A-Day rights were a pension value of £2.25 million and a tax-free lump sum of £225,000. HMRC registered a personal lifetime allowance of 150 per cent. No value is registered for Sarah’s lump sum rights as they do not exceed £375,000 i.e. 25% of the statutory lifetime allowance in 2006/07. She will be able to withdraw 25% of the value of her fund as a tax free lump sum subject to an overall maximum of 25% of the lifetime allowance at the time benefits are crystallised.

Vesting day

The scheme pays benefits valued at £3.7 million. The lifetime allowance is deemed to be £1.8 million and Sarah’s personal lifetime allowance of 150 per cent gives her a lifetime allowance of £2.7 million. A recovery charge is payable because her fund exceeds her personal lifetime allowance by £1m (£3.7m –£2.7m).

Sarah opts for the 55% recovery charge rate because she wants to take a lump sum from the £1m, and this is liable to the recovery charge. She therefore receives a lump sum of £450,000 in addition to her Tax-Free lump sum.

Frank registered for “Enhanced Protection status”.

Registration day

Frank’s pre A-Day rights consisted of a pension value of £2.25 million and a tax- free lump sum of £450,000. He registered a personalised lifetime allowance of 150 per cent and a “growth” lump sum of 20 per cent of pension value (derived from £450,000 and £2.25 million).

Vesting day

The scheme pays benefits valued at £4 million. No recovery charge is payable because of his “Enhanced Protection status” even though Frank’s personal lifetime allowance is £2.7 million (150 per cent of £1.8 million).

Frank takes a tax free lump sum of £800,000 (20 per cent of £4m).

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