Pensions A-Day

Transitional protection measures

These measures – primary protection and enhanced protection – could secure existing pensions benefits against the lifetime allowance restrictions and the subsequent recovery charge. Transitional protection is not automatic; it must be applied for within three years of A-Day.

Q What happens to surplus funds in a scheme at A-Day?

A If primary protection is sought, (only available for funds in excess of £1.5 million on 6 April 2006), it will only be possible to protect funds up to the current Revenue maximum benefits limits, which will be calculated on the day before A-Day using the formula defined in the regulations. Any surplus funds can remain in the scheme, however these may be subject to a recovery charge when benefits are taken if the total benefits upon vesting exceed the member’s personal lifetime allowance. If enhanced protection is sought (available to all funds), again it will only be possible to protect funds up to the current Revenue maximum benefits limits. Any surplus funds at A-Day cannot remain in the scheme but must be surrendered. At present this is not possible, however, it is anticipated that regulations will be issued to permit it.

If no form of protection is sought, any surplus funds in the scheme at A-Day can remain in the scheme for the benefit of the member. When benefits are taken, the member will be tested against the lifetime allowance to see whether or not a recovery charge will be applicable.

Alternatively secured pension

This will be available as an alternative to purchasing an annuity at age 75. Like existing income drawdown arrangements it allows income to be withdrawn directly from the accumulated fund. However, there is no requirement to take any income.

Q After A-Day, if an individual has opted to take pension benefits using an alternatively secured pension (ASP), upon death can his or her pension fund be passed down to grandchildren, (who are not financially dependant upon him or her at the date of death)?

A If an individual dies whilst drawing benefits via the ASP route, if he or she has any dependants, then the pension fund must be used to provide a dependants pensions. No lump sum is payable. If the individual does not have any dependants, then the pension fund can be paid to a charity nominated by the member, or passed to other members in the same registered pension scheme that have been nominated by the member, or selected by the scheme administrator.

Therefore, in order to pass the pension fund to grandchildren, the grandchildren must be members of the same registered pension scheme as the deceased, (at the date of death and have been nominated by the deceased to be absolutely sure). Inheritance tax issues on passing down pension funds whilst in ASP are currently the subject of a discussion document issued by the Revenue.

The answers to these questions are based upon current understanding of the Finance Act 2004 and subsequent regulations.

The new rules present a number of opportunities for your clients. However, the rules are complex and much of the new terminology may be unfamiliar. This is an ideal time to work with a financial adviser to discuss how you and your clients could benefit from these changes.